The 3 Best Times to Buy for Short-Term Traders

Traders aren’t concerned about fundamental analysis or economic indicators because in the short-term, all stocks fluctuate up and down. They are more likely to profit from technical indicators that show what the stock is doing now. Investors, on the other hand, aren’t concerned with the short term ups and downs of a stock; they want to catch the broader move in stock prices over time.

In terms of technical analysis, there are three spots on stock charts that are the best times to buy. This is critical to know for short-term swing traders to limit risk and increase reward -- traders want to calculate what the risk and reward is going to be before entering the trade.

Why is that important? It’s important because you don’t know if the trade will work out. If you don't set up your trades properly before the trade then you aren't trading with an edge -- you aren't putting the odds in your favor. For example, if you profit from 50% of your trades risking $1000 per trade, you aren’t going to make any money! For every $1000 in profit, you will lose the same amount and end up treading water (before commissions). Since many swing traders only make money on 40-50% of their trades, setting up your trades properly must be done if you expect to succeed at trading.

There are two things you can do to trade with an edge:

1) Set up the trade so that your reward is better than 1:1 – instead of risking $1000 to make $1000, you make $2000-$5000 for every $1000 risked. That is what I will show you how to do in this article.

2) You research for setups that profit more than 50% of the time. You can set up an account with TradeStation or another broker that offers research tools to help you do this, or just do it yourself using free online services like Yahoo finance or Google finance. There are books that teach how to do this and I teach it in my private counseling sessions (see my website for more details...).

As a short-term or swing trader, you only want to enter a trade when your reward is at least 2.5:1 and the higher the better (I've seen it sometimes more than 10:1). Know your entry point, your stop loss point, and your target profit point before entering the trade. Then you can calculate risk vs. reward.

Now that you know this, here are the safest places technically to buy a stock:

1) Breakouts – a stock going sideways starts going up, especially on high volume. The sooner you catch the big up day on volume the better. These moves tend to keep going up for days or weeks to come. (You know you’re wrong when the first strong day doesn’t follow through within a week or if it goes below the low of the day it went up on high volume. That point is usually much closer than the profit target, making it a low-risk, high-reward setup.)

2) Pullbacks – a pullback is a stock in an uptrend, but goes back down for a short period. For example, ABC stock went up from $50 to $70 in the past three months and dropped to $62 over the past two weeks. In the past three days it went sideways in a tight range of $.50 and today it went up $1. This is an excellent buy spot to buy because we have reason to believe the longer-term uptrend will continue, that the stock will go back up to previous highs, and the stock appears to be starting that uptrend now. You will risk not more than $1.50-2 to make $7-8

3) Note that #1 above is for a stock that is starting to go up and #2 above is for a stock that is going up (stocks going up are generally the kind of stocks we want to buy….). This is for a stock that is going sideways. Over the past month we notice ABC stock stopped going up when it hit $100 (resistance) and stopped going down when it hit $80 (support). The stock again is headed for $80 when we notice it hits $79.72 and has held above that in the last four trading days. This makes an excellent time to buy because you can risk $1.50 to make $10, a reward: risk ratio of more than 6 to 1. If you made this trade five times and were right once, the outcome would be: 4 losses x $1.50 = $6 Loss……. and 1 win x $10 = $10 for a total profit of $10 – $6 = $4. That is how to be wrong 80% of the time and still make money.

Stick to your stops! Put in your stop loss order immediately after the purchase. If you get stopped out, take a step back and take another look at the stock and what's going on.

If you flip these examples upside down, you also have the three best times to short a stock.

Traders who want to be consistently profitable in their trading need to understand these types of concepts that I teach. Go to my website for more information:

http://www.tradergstocks.blogspot.com/

Many profitable returns,

Trader Gregg