Never Miss a High-Flying Stock Trade

04/02/2012 3:00 pm EST

Focus: STRATEGIES

Deron Wagner

Founder and Head Portfolio Manager, Morpheus Trading Group

The pullback strategy allows traders to get in on strongly trending stocks while their momentum is still intact, and while they are trading near strong support levels, explains Deron Wagner.

We’re talking trading strategies here with Deron Wagner, and one strategy he uses is the pullback strategy. So, Deron, define what the pullback strategy is.

The pullback strategy is when we look to trade a stock or an ETF that’s already in a firmly established uptrend. It’s been trending higher for several months, and the 20-day, 50-day, and 200-day moving averages are all trending higher. This is a stock that we look to buy when it pulls back to a level of support.

Typically, the 20-day exponential moving average (EMA) is the line that we use—although it depends on the time frame—and the theory is that trends remain in place for longer than people expect. So the longer a trend has been intact, the more likely that trend is to continue.

The concept is that we simply buy the pullback to the support level of the trend line and then look to sell on the next move up.

So where do you set profit targets and where do you set a stop loss on something like this?

Well, typically, we look to stay in the stock or the ETF until it reaches the upper channel of the trend line. We draw a trend line off the uptrend and will look to sell into that move and then wait for the next pullback to the lower channel support. So simply drawing channels for the trend line.

As far as the profit target on that, you know, it’s probably going to be 10%-15% for a pullback trade.

The stop losses are typically below what we call the last swing low. The swing low is the prior low that forms the uptrend line.

So, Darin, are there any specific sectors or stocks that this happens to work well on right now?

It does vary depending on which industry sectors are showing the most relative strength, but typically, just as with our relative strength breakout type of set-up, the pullback scan works well with anything that’s in a steadily established uptrend.

So recently, it’s been the biotech and healthcare industry. There have been a lot of stocks that are trending very steadily higher. In fact, it’s been so strong that they’ve not even pulled back all the way to the 20-day moving average; often just pulling back to the ten-day.

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