Page 344 - THE MARKET WHISPERER

340 PART 10 - Winning Trades

How Do We Make Money from this Situation?
As noted, buying a red riding hood at breakout is not a good idea, but
buying it after its failure is a whole different story. Wait for the breakout,
wait for the failure, and buy when disappointed buyers are getting rid of
their stock at a loss of 12 to 25 cents beneath the breakout point. In most
cases, the stock will return to the resistance level where you will be able to
sell at one to two cents below the original breakout point. You may be able
to do this several times, as long as the stock has not broken out. It is a nice,
simple intraday scalping method with relatively high success rates.

Be warned, however: the method requires psychological stamina,
since it involves buying as a stock is trending down. If this is a strong
stock, it will want to go up. The reason for its temporary drop beneath the
breakout point is because a large number of buyers have suddenly fallen in
love with the formation and bought before the breakout, then panic when
the stock direction moves against them by a few cents. You need to train
yourself to operate against your natural instincts and buy precisely when
inexperienced traders are selling at a loss. On the other hand, if you bought
the stock at the breakout and it gets stuck at up to ten cents above the
resistance point and seems to be showing signs of dropping beneath your
buy point, flee it as fast as you can. Exiting a stock which is not doing what
it should be doing is also a tough psychological demand, since we tend to
convince ourselves that “if we just wait a little longer, it will be ok.”

Example of Red Riding Hood for Textron, TXT