rhk said:
VV,
Whats the theory and approach of a pull back. Lets take the example of RIL, it pulled back today all the way to 1026 and closed at ~1035. How do you read from the chart how much it will pull back, waiting 1 day or 2 days of pullback is another question, what do you recommend. Also Dabur how much do you think it will go...pullback.
Another one if you can throw more light on is Reliance communication, what do you think is going on with this one.
Would appreciate any other thoughts on pullback and entry.
Thanks,
Since we are headed for holidays, I will respond later to individual stocks.
Pull Back for entry:
As you might have read already, there are 2 levels you need consider before you open a position in a stock.
* Setup
* Entry
Setup
Setup tells you the scenario under which you will consider that stock for opening a position.
eg:
1. If you are trend follower, you will select a stock only if it is trending up or down. You will avoid stocks if they are in trading range.
2. If you are a break out player, you will only consider a stock if it has been in trading range for some time.
3. Various Patters: Double bottom, Double top, First Thrust, Head & Shoulders.
Entry
Specifically tells you how you will open the position (buy/short) in a stock.
eg:
1. If a stock is trending, you will buy at pivot point.
2. If a stock is trending, you will buy after a pullback and above today's/yesterday's high + x.
3. If a stock is in trading range, you will buy 1 day after breakout.
4. Each pattern has a way to enter a position after the pattern is complete. For example, in Head and Shoulder's patter, after the right shoulder forms, a line is drawn touching the lower shoulder, neck and right shoulder. You need to enter when this neck line is tested.
Determine what suits you and what makes sense.
One of my criteria for entry is Pullback. Pullback makes sense to me because,
1. I don't want to buy at high.
2. I am ok with missing action in the mean while.
3. I am not ok knowing that somebody is making profits by selling to me at high price.
4. According to Elder: Buying at recent high is believing in fools theory. Because, when you buy, you plan to sell to somebody at even high price. So, if you buy at high price, you are believing some other fool will buy from you at even high price.
After a pullback, Second criteria for my entry is buying above today's or yesterday's high + x. I use this criteria because,
1. I want to make sure there is still upward movement in the stock.
2. I want to buy when the stock is going up and not down.
3. You can never determine the end of downward pull. As the stock goes down, you reduce your buy point.
No criteria is full proof. There are downsides to the above Entry criteria.
1. Inspite of today's/yesterday's high + x, the stock might trigger and reverse.
-----One way to avoid some of these wrong take offs, is not enter position if the open price of a stock is greater that your entry price on that day. So, at the beginning of the day, make sure the stock does not have a open price more than your entry price.
2. Pull back may continue. You should consider based on the stock/market pattern whether it is still pull back based on profit taking or sell off. It is prudent to avoid pull backs that are more than 5 days.
Most important as I was say (preach) is, select a way to do things repetitively. Try out on atleast 10 trades and see how it works. Modify to suit yourself. Don't make changes for each trade.
