It was a ‘do-or-die’ football game. Shame or glory.
My team was nervous before the match. The final score would decide if we deserved the championship title.
The players trained hard for the competition.
But our star player injured himself during a warm-up session. So he wasn't included in the line-up.
The news affected the team performance. We were down by two goals at half-time.
In the dressing room, everyone was quiet. Without warning, our hot-tempered coach called everyone to gather around him.
Usually, he nagged about the importance of field discipline. This time, his speech was refreshing.
He rallied the team and instilled a strong belief that winning was possible.
The talk lasted only ten minutes. But it was inspirational. Coach reignited the burning desire in us to fight for a comeback.
Apart from re-strategizing our tactics, we visualized how we’ve won the game too.
It wasn’t surprising what happened after that. We beat our rival with a full-time score of 5-3! What a fantastic night.
Like that epic match, you'll face similar setbacks in your stock investments too.
There'll be times your sweet profits can spiral to zero or even hit negative.
But you must understand why it happened. In technical analysis, the stock consolidates to digest its gains. And the weak holders are selling their share as they convert the profits into cash before they turn into losses.
So what would you do? Sell? Hold? Or keep buying?
The next chart pattern would address this matter in detail.
A correction began when a stock price declined after an uptrend. Some call it ‘retracement’ or ‘correction.'
Traders take this chance to look for opportunities as the stock reaches support area or line.
In a bullish market, the bounce after a pullback can be healthy.
A pullback usually happens after the stock price reached a new high. One reason is the lack of any potential resistance.
“The Market is Due for a Pullback after a Big Advance.”
Well, this quote is half-true.
A price uptrend stays in the same direction until factors like economy or politics stop its run.
The stock may continue to advance higher than we expect. No one can predict when it'll exhaust itself and make a correction.
Since nobody can figure the extent of the price run, it's better to set stop loss or target exit point.
Rather than worry about the next pullback, why don’t you react to the price action itself?
Pullback begins when the stock price retraces towards the moving average lines.
So what happens during a pullback?
When a leading stock consolidates, financial institutions buy more shares as price declines.
But winning stocks are unique. They can hold above the 50-day moving average line for the majority of their advance.
Take caution though. If a stock revisits the moving average line many times in a short period, it’s a sign that the pullbacks exhausted. Be alert.
A pullback in light volume is preferable than one in heavy volume. The former shows that institutional investors support for the stock remain steady. Few are also dumping their positions. The latter is a sign of an unhealthy market, i.e., lack of institutional support.
When a stock falls and pulls back, it doesn't mean the stock is a failure. Leading stocks recover fast by making price reversals. Such actions present buying opportunities. Look out for reversals that come with massive volumes. It's riskier to buy when the volumes are light.
Here's a side note. Volatile stocks are hard to hold. It can shake you out early. If they are floating around the moving average lines, get ready to sell them.
Stocks are also easier to hold occur in the early stages of a bull market. That’s because the institutional investors are eager to get their money to work.
But, it’s not true for late stage bull markets. Stock price-runs tend not to work well here because institutional buying isn't much. It's common to see stocks continue to fall below the moving average lines.
WHEN TO BUY & SELL
The key to profitable pullbacks is when you’re trading in a trending market.
No matter. Wait for the leading stocks in a trending market to make strong moves. Then look to enter when they correct within the trend.
First, identify the momentum of a stock chart. Which direction is the price moving? It’s the path the market is likely to continue move in the future.
Next, focus on the support, resistance as well as moving averages. Watch for the price to pull back to these indicators. Then wait for a price action confirmation signal to enter.
As for selling, there are many options to unload your shares. Here are two ways for your consideration:
Sell when the current price is 10% below the buying price. 10% is your max stop loss. You can change your loss limit based on your risk appetite, i.e., 2.5%, 5%, 7.5%, etc
Sell when the current price hits your target profit. For example, it could be 10%, 15%, 20% or more. The idea here is to convert the paper profits into cash and to secure them before they turn into losses.
The bull market needs regular technical breaks. Price retracement is healthy for the market.
To shake off weak investors, it moves sideways for a while. Or, the market can also make a pullback as explained above.
Pullback allows low-risk entries for you to own stocks. When the price decline triggers the stop loss, you sell your shares to preserve your capital. But if you're right, continue to ride the favorable trend until your exit rule resurface.
Finally, the pullback also teaches habits like discipline and patience.
You can't enter whenever you want. Pullback forces you to wait and watch for the right opportunity to make low-risk buys in the market.
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