Aggressive Pullback Traders
As we know,
no matter how strong a stock may be, it cannot go up forever.
It has to rest. It needs to pull back a few days. Stocks gyrate and
churn, never going up in a straight line. In other words, strong/weak stocks
usually pull back from their highs/lows before resuming their uptrend/downtrend.
For example, if you want to trade a pullback from a high, you try to buy the stock when it takes out the high of the prior bar. For a stock
pulling back from its lows, you sell it as soon as it trades below the low
of the previous bar.Â
If you think about this idea of “pullback,” it gives us another way to
trade stocks. This method is for aggressive traders only. As I stated earlier, a
strong uptrending stock goes down a few days before getting back to its upward
move. The key word is “a few days.” Normally, traders wait to jump on
the stock till it begins to show a sign of strength. But, why wait? Why can’t we
short the stock because it will probably decline next 3 to 7 trading days. Just
don’t forget to place tight stops. Let me show you an actual example.
BP Amoco P.L.C
(
BP |
Quote |
Chart |
News |
PowerRating) hit a 2-month high on April 26. The following day, April
27, the stock formed an inside bar. Remember, the inside bar also counts as a
part of a pullback. Therefore, I was looking to sell BP if it traded
below the low of the inside bar. As you can see on its daily chart, BP
traded below the low of the inside bar on April 30 and proceeded to sell off.
Before bouncing off the 50-day moving average, BP recorded its intraday low of
50.65 on May 3, a loss of almost 4 points in four trading sessions.
Again, this method is aggressive traders only. Don’t forget to place tight
stops.