Buying Pullbacks – the Error Most Traders Make

pr80915.jpgYou have heard it often buy dips in bull markets and wait for the market to rise but buying dips is not as easy as it first seems and most traders lose. Let’s look at how to buy them correctly, avoid losing trades and pile up some good profits.

Ask yourself this question. If you see a level of support and prices are moving down towards it – price momentum and the trend is against you. So why do you want to buy? Most traders will say support “should” hold, so get in just above at support and you’re in with good risk reward.

No your not – The markets are not as easy as that. The fact is that levels of support that “should” hold more often than not don’t hold. Trader gets stopped out as support is taken out. Doing this in leveraged markets will soon see your equity wiped out.
The better alternative. Is to look at price momentum and get confirmation that the support level HAS held and prices are moving up again after TESTING support. You’re not predicting – you’re acting on CONFIRMATION and trading with the trend. The way do this is top use an indicator that measures price momentum and near term strength.

The way to do this is watch the market move to support and wait for the price momentum to reverse. This is done by watching for a cross in the lines with bullish divergence – then you trade. This way you have higher odds that the support has held and the chances of prices resuming the up trend are greater. This effectively puts you in with price momentum after a test of pullback support.

If you buy pullbacks this is the way you are getting the odds in your favor and that’s what trading is all about. The professional traders are not interested in being clever or predicting – they want to trade with price momentum and the trend and get high odds trades and this way will ensure you do to.

There’s an old saying: “A bottom picker becomes a cotton picker” So don’t predict, get confirmation. You will then find not only does this method keep you out of a lot of losing trades but will also create some high odds trades and make some great profits.

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2 Responses

  1. Richard says:

    I’d suggest trying to understand why index funds are so strongly recommended. And also investing in shares in companies that you really understand.

    I’d also second the idea of creating a paper portfolio, to see how your tolerance for risk is.

  2. Jasonnoguchi says:

    Very good advise. All traders must always see confirmation of a reversal before buying into a pullback. The reason why so many beginners fail is that they never wait for confirmation but instead act on a hunch.

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