Welcome to post #9.
For the previous one, Breakouts were discussed. If it breaks through a significant resistance level with a significant amount of volume, the price tends to rise dramatically at that point.
But I said don't just randomly hit the “buy” button when a stock is skyrocketing!
Why? Chasing a big green candlestick is what all beginners do that gets them wrecked. When you purchase the stock after it has risen 50% in 10 minutes, you are purchasing at the top of everyone else's FOMO. It's the time when the smart money is lining up to sell.
Professional traders, on the other hand, wait for a certain setup. It's called The Retest.
The procedure is as follows:
In the market psychology, a peculiar thing happens when a stock reaches an important resistance level and breaks out (assuming it is at $2.00). That old $2.00 ceiling? Suddenly becomes a brand new floor (Support).
However, the market never wants to be mistaken about the new floor's foundation.
So, the stock will rocket up to perhaps $2.50... and then the early buyers will begin cashing in. The price will pull back. $2.40. $2.20. $2.10.
Here, you get really lost if you're a beginner. They believe that the breakout has not worked, and that the stock is bound for doom.
But the pros? They just sit, they watch. As they wait to see what happens when the price returns to that old $2.00.
If it is a genuine strong breakout, it'll go up to $2.00, and then like a trampoline off it, and begin to rise again.
That is the Retest. That is the same bounce when you actually get to click the BUY button.
What is the need for the Retest? Two massive reasons:
The stock bounced off the new floor and that's enough to prove it wasn't a Fakeout.
2. Your risk is very small. If you purchase bounce for $2.02, then you know your safety net is at $2.00, which is just below you. When the floor suddenly breaks and the price falls to $1.95, you simply sell it right away. You suffer a negligible and minuscule paper cut loss and get on with your day.
It is not a matter of catching all wild moves. It's all about the wait for the absolute lowest risk set up.
I'll be honest. At first it is really unpleasant to wait for retest. There will be some stocks that you're going to see fly away without you, and you're going to feel like you missed out. However, being disciplined enough to wait it out is the only way to avoid purchasing the highest point in a pump-dump.
The truth is, however. With the best chart, the best volume and the best retest, trades still go astray. You will be wrong. A lot.
So in post #10 we will discuss the one mechanical rule that will keep you in this game in the long run, The Stop Loss.