Page 314 - THE MARKET WHISPERER

310 PART 10 - Winning Trades

Entering a Reversal: Market Rules

For a successful trade, we need a market helping us in its general direction.
This means we need to enter a reversal with a trending up stock only
when the market, as embodied by the S&P 500, supports continuation of
that trend (or the reverse for a trending down stock). Of course, we must
ensure other fundamental market conditions as with any trade, such as an
appropriate risk-reward opportunity ratio, a reasonable stop point, and
changes in volume that match the trend direction. For example, when a
trending up stock pulls back, we must check that the volume is decreasing
as the stock drops, but when the stock returns to its initial trend, we would
prefer to see volume increase. The meaning of increasing volume is that
you are not the only ones identifying the opportunity, so you benefit from
the assistance of other traders.

The Entry Point

The correct entry point is responsible for 80% of a trade’s success. The
entry point in reversal is not a precise science, but I will try to define it in
a way that allows you to come as close as possible.

We buy a reversal only when the stock has made a real pullback from its
peak. The way to “feel” the right entry point is to try and imagine when you
might sell the stock if you had bought it at its peak, but it trended against
you. Observe the entry point and imagine where you would feel pressured
and want out. If the stock has dropped below that point, it means that most
of the weak buyers have already sold, and that this is therefore the correct
position for clicking the button. You need to do the exact opposite of what
pressured buyers who bought at the peak did.