Stock Trading: Portfolio Building and the Science of Buying Pullbacks
One of the biggest questions many traders have when they begin looking to buy stocks after they have pulled back rather than after they have rallied is this:
How do I know which pullbacks to buy?
Deciding which pullbacks to buy when stock trading depends on a number of factors. But the most important thing to remember is that there is a trade-off between the size of the pullback (and its corresponding oversold bounce) and the frequency of potential trading opportunities.
In other words, buying deep pullbacks tends to produce bigger gains than buying shallow pullbacks. Strategies built around buying deep pullbacks tend to have higher win rates than strategies designed to buy more moderate pullbacks.
At the same time, traders who only trade deep pullbacks made miss out on trading opportunities in some circumstances. Most commonly, this can happen when markets are in extended bull runs, during which pullbacks are short and shallow.
So, which pullbacks should traders focus on? The answer, you might imagine, is “both.”
Find out why traders need to have strategies to help them succeed in trading both markets with sharp pullbacks and corrections as well as markets with more shallow dips. Join Larry Connors at his upcoming, free online presentation: How to Engineer Your Portfolio for Profits this Wednesday – presented by TradingMarkets. Click the link below to learn more.
Here are 7 Stocks You Need to Know for Tuesday
Shares of ^AA^ were down well over 2% ahead of an earnings report after the bell on Monday that missed on profits by a penny, but significantly exceeded revenue expecations.
AA has closed lower for two days in a row, and is just outside of oversold territory above the 200-day moving average.
Welcome to the Nasdaq 100! ^SIRI^ will be added to the key Nasdaq index according to an announcement on Monday. The stock is only recently off overbought conditions above the 200-day moving average.
Traders took profits in shares of ^AAPL^ during Monday’s session, selling the stock after it has closed higher for six days in a row.
What’s up on a down day? Shares of ^CLX^ gained well over 2% to close at their highest level since late May.
^FAST^ is among the few companies reporting quarterly earnings on Tuesday.
The stock pulled back by more than 1% on Monday, having rallied to year-to-date highs last week.
Closing lower for a fourth day in a row ahead of trading on Tuesday are shares of ^INTU^. The stock is set to open in oversold territory above the 200-day moving average for a second day in a row.
Our PowerRatings Stock of the Day is ^HANS^.
Shares of HANS earned PowerRatings of 8 as of Monday’s close. The stock has pulled back for three days in a row and was down more than 2% ahead of Tuesday’s trading. Note that HANS is also only recently off year-to-date highs. To learn more about trading stocks using PowerRatings, click here.
Remember you can still pick up a copy of Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs for free! Paperback or PDF download, click here to indicate your preference.
David Penn is Editor in Chief of TradingMarkets.com