Trading Tactic - How to Enter a Position with Momentum on Your Side

You have been watching this stock for weeks. It is setting up exactly as expected and you check it every day with eager anticipation of the stock finally falling into your strike zone. Finally that day comes and you decide that now is a good time to enter the position but how do you actually go about pulling the trigger? Is it just a roll of the dice in terms of timing and price?

Entering a position with market orders is a mistake that amateur investors make all to often. This is a mistake that I learned to avoid after watching it cost me money time and time again. Because of the fact that I am a technical trader, I expect stocks to bounce off (or at least hold) certain resistance levels. This was the case with FIZ as I mentioned in my last post. What I want to address now is how I went about entering that position and how this simple technique can save you time and time again.

The day of my post FIZ was in a solid down trend into the 3 levels of resistance. I wanted to confirm that these levels would indeed hold first and cause the stock to bounce and thus I put a stop price 25 cents above the close that Friday. Monday morning comes along and the stock opens slightly higher but not high enough to trigger a buy and then proceeds to fall the rest of the day. It falls over 2% that day and my stop order to buy is never hit. This means two things, first not only did I not purchase the stock and start with a 2% loss but I also get a chance to move my stop lower. Next day, same situation. I put the stop order to buy 25 cents above the price and the stock continues to fall (about 1% now) and thus I save myself again. I watched the stock fall through 2 of the 3 resistance levels I thought might hold. Finally the stock pauses at the third. I put my buy at 10 cents above this price and it gets triggered. The rest of the day the stock climbs almost 2% and I am in the green, as oppose to just buying the stock with a market order and finding myself trying to get back to even.

My point is that by not using market orders to jump into the position, we can better control some volatility (unexpected continued declines in this case) and thus increase our profit margin. So while my fundamental and technical analysis of the stock remains the same, the price at which I actually enter the position will be much lower (over 3%) and I ensure that momentum is on my side at the time I enter.

2 Comments - Post your comment below.

Tarik
Oct. 5, 2006

Nice post. I have been aware of stop orders for quite some time, but am unable to execute them. I use a discount broker, Sharebuilder, and it only executes trades on a given day every week to take advantage of dollar cost averaging. Dollar cost buying is great, but I've overpaid for a few securities due to timing. From a technical point of view (I'm a fundamentals guy), how could I ease my buying pains?

Chad
Oct. 6, 2006

Tarik, good question! I am fairly familiar with how Sharebuilder works as one of my close friends goes through them. It is a nice cheap way to get invested in the market but it is strictly for long term/fundamental investors like youself. Sharebuilder is not very liquid, like you said, and thus is not the platform I would choose with respect to day and swing trading. If you were interested in getting into that more, I would suggest a brokerage like Scottrade (my broker).

As for right now, your buying pains should be eased by the cost averaging of the system. It is going to be tough to control this through Sharebuilder but it is not entirely a bad thing. If you feel it is causing you more harm than good, consider switching to a more flexible/liquid trading platform. Hope this answers your question Tarik!