Trading Tactics

When it comes to entering the position, there are a number of ways we have looked at in previous modules, and here’s a summary of the main tactics. There is nothing special about them, they are simply ways that have been established on commonsense principles, and that seem to work the majority of the time.

The Breakout

Often the price will hang around in the same general range for a time, with what is called trendless or sideways trending, or sometimes range trading. Then something happens, and for some reason the price starts moving either up or down, beyond the range it has been in.

When the price breaks out from an established pattern, you may consider that a new trend is starting. The question is at what point you should decide to take the trade, and there is no one correct answer. You can take it early in anticipation of the breakout, acting on signs from technical indicators and chart patterns, but you stand a risk that the signs are not going to play out as you expect, and the breakout may not happen. On the other hand, if you hesitate too much, you may find that the move is nearly over by the time you are sure.

It’s a balance. What many traders do is identify a price level which they are comfortable with saying is a level that will not be reached if the price is still trending sideways. Then by definition any move beyond that level means that a trend has started, and you can trade with a reasonable expectation that it will work.

Trendlines

If you have an established trend, you can choose to enter the position when the price is on the trend line and you’re expecting a continuation of the trend. If the trend continues to hold, you expect the price to continue up in an uptrend, as the trendline establishes the lowest point of support. Similarly, in a downtrend the trendline marks the highest level of resistance.

Breaking the Trendline

Another use of the trend line is to watch for a technical sign that the trendline is about to fail, and the trend may reverse. You can also use this as a reason to exit an existing trade.

Support and Resistance

Using support and resistance is similar to the process described above with the trendlines – because trendlines are simply angled support and resistance lines, when you get down to it.

So if you have an established support level, and the price comes down to touch it, with no indication that the market has changed you may choose to take a long position, expecting the support to hold. The same applies with resistance, as a price that has risen to resistance should be repelled by definition.

Once again you can look for breaking of the support or resistance. Traders use different indications to confirm that the price has truly broken, and may not return again to the previous range, for instance they may require that the price stays outside the support or resistance for two trading days, or that it is more than 3% away.

This tactic is very similar to “The Breakout” above, but is generally applicable whenever you have found solid support or resistance levels, regardless of whether the price has been trading in a limited range previously.

Retracements

Even in an established trend, we know that the price will not simply go in one direction all the time. Periodically, there will be retracements which technical analysis tells us are commonly from 1/3 to 2/3 of the distance that the last leg moved. By keeping an eye on a trending price, you should be able to see firstly how strong the trend is, and secondly when a retracement has started. If it is a strong trend and likely to continue, you have two ways to play the chart.

First, you can trade countertrend, jumping on the retracement but watching carefully when significant levels, such as 33% or 50% of retracement are reached to see if the move is over; secondly, you can watch carefully for the move to be over before trading with the trend, and this means that you take an early position on the price.

Gaps

Even gaps can provide information to allow a good entry. If the price retraces to a runaway gap, you may expect that the gap will give support and that the trend will resume. In this case, you would buy if the price dipped to the gap. The overall concept is to buy when the price is near support, but to watch carefully for any violation of the support so that you can exit a losing trade.

 

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