Buying on pullbacks can be difficult to do. But this is a skill that every trader needs to learn to take their game to a new level and become a more consistent trader. Like any other skill, the more you do it, the better you get at it. Below are a few guidelines that have helped me find good entry points as a stock pulls back from a recent up move. I will use the current market we are in for examples of what I am looking for. I will be explaining pullbacks from the long side. I also use the same guidelines to short stocks in a weak market.

1. It helps to be in a trending market,  i.e., market is a bull or bear.

2. Know what sectors are leading the market’s trend.

3. I like buying market leaders and leaders in the sectors that are leading the market trend. ie. GS, AAPL, FCX, TGT.

4. This point is key: I like to see these stocks pullback to support levels on LOWER VOLUME. Sometimes the pullback is pretty intense, especially in higher priced stocks. But, as long as the volume is average or, better yet, below average, I stay the course. If this occurs I am pretty confident that this is still a pullback and not a reversal.

5. I want these leading stocks to pullback to support or key levels.  This can mean different things to different traders depending on their time frame and risk tolerance.  To figure out what those levels might be I like to use the following:
-Past resistance as support.
-Price action at certain levels. This can happen anywhere, but it means some kind of unusual held bid or a fight that occurred between buyers and sellers where the buyers won.
-The stock pulls back to a moving average. I like to use the 14 day, 20 day, 50 day and 200 day simple moving averages, depending on my time frame.

6. Another key point: After entering into the trade, I like to see the stock go up on VOLUME.  LOW VOLUME ON THE PULLBACK, HIGH VOLUME as the stock advances higher. This is a sign of strength.

7. Lastly, and this goes with out saying, WHEN I AM WRONG I GET OUT OF MY POSITION!! NO IF, AND’S, BUTS or MAYBE’S about it. I am not in the business of averaging down. There is a difference between averaging down and buying into a pullback.  One makes you money and the other ends careers.

These are guidelines to follow, but keep in mind not much in the world of trading is black and white. Be aware that pullbacks can be messy and uncomfortable, especially for newer traders. But, your ability to recognize good entry points for strong stocks pulling back in an upward trending market will make you more money and help you become a consistent trader.

Good Luck.

Jtoma

Don’t forget to follow us on twitter