Buying into Strength is a standard professional strategy that helps traders avoid whipsaw action and temporary retracements caused by large lot profit taking.
ZIGO is our stock chart for this week to explain and show how buying into strength rather than using a limit order that gets you in at “a better price” is the preferred choice of professional traders.
Below is the daily chart for ZIGO. The stock formed a consolidation, then moved up a little and is consolidating again. You are trading the swing style resting day entry patterns and feel this may be a good entry before the stock moves up again.
Chart 1
The rule of entry is: buy into strength. But you have heard other traders talk about getting in on a limit order which says: buy me in at this price or BETTER, which means: LOWER in the marketplace.
You feel pretty good about this new strategy so you enter your limit order to buy you into this stock.
The next day, the stock drops and your order is executed. You’re not too worried because you are confident this stock is trending up. You are using your favorite indicator MACD which is a momentum moving average based indicator.
Chart 2
You hold for several more days but the stock continues to move down rather than up. A big engulfing black candle forms and you either sell out at a small loss or you hold on desperately hoping that the stock will reverse.
Chart 3
Those of you who hold hoping it will turn around find yourselves losing even more money as the stock drops further. By this time most short term retail traders give up and sell out.
Chart 4
The reason you lost money was:
1. You bought into weakness using a limit order allowing the computers of the market to buy you in as the stock was falling in price. Not a good idea. This strategy is promoted a lot. The notion is you “save” money with a limit order. But more often than not, the above scenario happens.
Buying into Strength means:
1. Analyzing the strength of VOLUME and Institutional buying activity to determine that the stock is going to move up and has strength to sustain that move up.
2. Using a controlled bracketed order that ONLY triggers if the stock does move up into your buy zone but also controls what you pay for the stock.
The Buy into Strength bracket order ONLY triggers when the stock moves up into your order price. Now you are in a stock that is moving up making nice profits rather than a stock moving down.
Chart 5
Summary: ZIGO did have upside potential but during the January so many commentators, gurus, and market “experts” were predicting a market correction that many pro traders took profits early and many retail traders got over zealous and started selling short the market. This caused a brief correction on many good stocks like ZIGO. In fact this minor short term retracement is seen on many charts.
The downside sell off of January was very brief because at this same time, Mutual Funds were being invested in by the small lot investor who uses Mutual Funds for their investing. This increased the money in funds accounts allowing institutional investors to jump to good stocks like ZIGO and buy it on the dip.
The Gap took the stock back to its original buy in price and the stock ran up in a velocity run for 4 days.
Limit Orders are usually used improperly by retail traders and are the cause of many poor trades.
Notice also that the TechniTrader® indicators were weak on the initial setup but much strong after the gap.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
(c)2011 Decisions Unlimited, Inc.
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