I hope you enjoyed my last blog on Beating the Crisis. Since writing the article we are up 22% on Oil. If you haven’t read it, please do make sure you read it as this is invaluable information. Just wait for it to drop again before you get in.
This month, let’s turn our attention to Buffalo stocks that don’t go sideways, but actually crawl up (or down), and turn into vertically rising (or falling) Buffalo stocks, that look like a big Caterpillar.
Trying to time vertically rising (or falling) stocks is more complicated than sideways buffalo (see article 2 months ago). This is because with the sideways buffalo the lines stay the same and once you know your entry and exit points, they tend to stay the same. With the vertical buffalos the challenge is that once you have drawn a vertical line, it moves up every day so your entry point changes on a day to day basis.
Let’s take a look at the chart below as an example. This company’s price chart goes up and comes down but the general direction is up. Notice how the highs get higher and the lows get higher. This means it is trending up. We can draw a vertical line at the bottom of the lowest points and we notice that the price seems to obey that line, as if by magic.
Is this mere coincidence?
If it had just touched it twice then this might indeed that been coincidence. But when it comes down again and again to the line, and this is seen in stocks all over the world, then this cannot be mere coincidence.
In our experience, the same people all around the world are looking at this same stock. They have all drawn the same lines. And when the price comes down to the line, what do you think they are looking to do? That’s right – they are looking to buy. It becomes an almost self-fulfilling prophecy, and this keeps happening until one day, it stops happening, either because the stocks breaks up to the upside or down to the downside.
What is great about vertically rising stocks is that the moves can happen very fast. Why? Because it has momentum to the upside. With higher lows and higher highs, you are already increasing your chances of making money because the trend is up. If you buy you are going with the trend. This is an important lesson: Always trade with the trend. That is why if we see a trend that is down, we don’t buy into it because it might continue down. And we don’t know for how long, so we like to ensure that we go with the trend.
How can we tell if a stock is trending up (or down)? The most commonly used way of ascertaining this is to find a minimum of 3 levels of support. If we look at the price chart above, you will see that there are four times that price has come down to the level of the line. So there are more than the 3 we are looking for. This means the trend is most definitely up.
So now, we are looking to enter with the trend.
So how can we make money out of this? We wait for the 3rd bounce and try to get in as it starts to rise, using something called a STOP order, or we now wait for the 4th time it reaches that point and then get in at that price.
Very important is that we place our stop loss just below the low of the bar that touches the line. Equally important is that we allow the stock to go up as long as possible. Since the highs are getting higher and the lows are getting lower, this stock could go up for the foreseeable future, maybe even years.
There is always the temptation to come out too early but resist that temptation if possible. You can always take out some of the profits when it reaches a high, for example 50% but allow the rest to continue. You could raise your stop loss to just underneath the stock when it is near a high – so if it decides to come back down you take the profit automatically but if it wants to continue up then that is fine too.
Sometimes we see the same formation as stocks go down. If we look at the price movement below, we can see, we see a vertically falling Buffalo stock, much like a caterpillar again.
Can you count the number of bounces it had coming down on the vertically line?
If you counted 4 then that is correct. And again, we can either try to get in on the 3rd bounce using a STOP order or wait until it comes back again to the line and then sell short.
And remember if you go with the trend, you can make money fast. In fact not only are the lows lower and the highs lower, but generally you can make money faster when markets go down. Just look to see what happened in May. Can you see how the price jumped down from when it touched the line? This is called ‘gapping’ which means that a large player sold overnight and when the market opened the price was substantially lower.
Selling short, or making money from falling stocks is the topic of next month’s article but for now just rest assured you can make money whether markets go up or go down, you just need to know which button to press. And some risk management, a topic we will be covering in a future edition of this blog
Are we going to make losses? Of course we will make losses ever so often, however due to the fact we use tight stop losses and let our profits run we make sure that are gains are much larger than our loses, thus more than covering any trades that may have gone into a loss.
In these times it is a MUST for you to learn more about what trading and investing in stocks, commodities and precious metals has to offer. We are having a series of 1 day events where we go through the strategies so you can take control of your own finances. But first, why not go ahead and download your FREE STRATEGY REPORT.
For your copy of my book The Lunchtime Trader please click here!
Until next month,