Bulkowski's Trading Techniques Quiz

Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved.

This article discusses trading entry and exit techniques such as bottom fishing and momentum trading for stocks or almost any type of security.

Trading Techniques Entry: Bottom Fishing and Momentum Trading

Here's a quiz based on the figure to the right.

Imagine that you are trading a stock shown by the curved line in the figure. A and B are at the same price....

Question: Would you rather buy at A or B? Why?

Answer: At A, price is still dropping and it continues to drop after A. Of course, at A, we don't know that price will move lower, but it's a good bet because a trend in motion tends to remain in motion. Buying at A is what happens when you try bottom fishing -- buying as price drops, expecting a reversal after price bounces off the bottom.

Buying at point A is common in bear markets when traders and investors take positions after guessing that the market has finally bottomed and is either reversing or will do so soon. It's a recipe for disaster when the stock continues lower. Often, investors will throw in the towel and sell just days or a few weeks before the stock bottoms. They sell when they should be buying.

Now look at point B. Price is moving up. You missed the bottom, of course, but the sky is the limit on the upside. Buying at B is the higher reward, lower risk entry. It's a momentum play: Buy high and sell higher.

Point B is my preferred entry location.

Go back and look at your trades and determine if you are buying at A or B. If it's hard to tell, then switch to the higher time scale and use a LINE chart instead of candlesticks or price bars. That may help show the trend.

Trading Techniques Exit: The Sell Side

You own the stock pictured in the chart to the right. Both C and D are at the same price.

Question: Would you rather sell at C or D? Why?

Answer: Price is moving up at C. Why sell if price is rising? Any delay will mean more profit. Often, point C represents the type of exits I take. I think price is going to drop so I exit only to find that price continues to rise after a short retrace.

At D, price has already peaked and is now tumbling. It's time to exit.

If you wait until D to sell, then every delay means a larger loss or less profit. Price drops faster than it rises. I proved that, so it's not idle speculation. If you wait to sell at D and don't get out quickly, you can get whacked. Nevertheless, point D represents my preferred exit.

Trading Techniques: That's A Wrap

Since the buy points A and B and sell points C and D are at the same price, it doesn't matter which you buy and sell at. However, the price trend and delays can mean increased profit or larger losses. Decide which setup is best for you before you trade.

-- Thomas Bulkowski

Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. Zero defects definition: The result of shutting down a production line.