The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Buy Trend Moves Late and Still Profit
05/08/2012 3:35 pm EST
It's rarely too late to catch a strong trend move, says Al Brooks, who explains how to buy at the market and manage risk so as to stay safe even if a reversal or consolidation takes place.
We're talking intraday trading with Al Brooks. Al, if you've not taken a position when looking for a trend intraday, and then the trend reveals itself, what do you do then? Do you step in; do you walk away? How does that play?
That's a very important question, and it comes up all the time. If I look at a chart and I'm flat, and the market's strongly bullish, and I really wished I was long, you have a choice: do I buy at the market, or do I wait for a pullback?
If the trend is very strong, for example, a small pullback on a bull trend day, it can run a long, long way before it ever has a pullback, and you’ll end up missing a lot of the trend.
Instead, what I do is look at the chart and ask myself, “Had I bought lower, what size position would I have right now, and where would my stop be?”
So if I'm buying a $50 stock and it had a small pullback, you know, five or ten bars ago, and that would be the logical place for my stop, and it might be 50 cents below where we are right now, I would decide that if I buy at the market right now, I'm going to risk to below the low of that bar, which is 50 cents and $50 per every hundred shares of stock.
I decide how much I'm comfortable risking, and if my risk is normally $200, I would buy 400 shares at the market and use that original stop. Then, if the market keeps rallying, I can eventually move my stop to break even or better than break even, so even if the market trends against me, I'll be guaranteed at least a small profit.
On the other hand, as soon as I enter, if the market begins to pull back, I think there's an 80% chance that the market will come back to my entry price within ten or 15 bars or so, so I don't get worried about that.
Even if I buy at what turns out to be the high tick, trends usually don't just reverse abruptly. They usually enter a trading range first, which means that there'll be a pullback, and then the market will test the old high, and if I bought at the old high, I should be able to get out around break even, or maybe even a little profit.
Sometimes, I'll even buy more on the pullback, so that once the market tests the old high—my original entry—I can get out of my original entry at break even, and I'll have a profit on my subsequent entry.
In general, when the trend is really strong and I wish I was long, I get long, but I just trade small enough so that my risk is not more than I'm comfortable handling.
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