Question:
Hi guys

In Mike’s great book he talks often of “buying right” most often using limit orders at resistance/support levels and on dips during a momentum trade. For a while I’ve struggled to find the best time to do this. Can you please tell me, using a long trade as an example, do you place your limit order at your calculated buy level let the market drop into it and then hope it goes up rather than continuing down to your stop level, or do you first wait for it to pass down to your buy level, wait for evidence of turn-around/consolidation/buy strength etc. and then buy ?

Any assistance you can give would be much appreciated as I’ve struggled with this for a while, thank you 🙂

Bella Responds

Great question.  And thxs for following us all the way from Australia 🙂

When to buy depends upon a few factors:

a) how important is the level?

b) are you an aggressive or conservative trader?

c) is there any fresh news about the stock that may greatly impact this level?

d) will the strength or weakness of the market override the importance of this level?

We ask our traders to judge their levels from 1-1o.  Not all levels are created equal.  If we love the level then we will buy without confirmation.

As a trader it is important to know who you are.  If you are an aggressive trader then assuming there is no particularly troubling fresh news or the market is not impressively weak, then buy.  If you are conservative, then you should probably wait for confirmation.

If there is fresh news that will materially change how buyers view the stock, I may pass on this support trade.  An example, might be the company guides down for the entire year massively below expectations.

If the market is impressively weak, I may pass on this support trade.  An example, would be if the market is down more than 2-3 percent intraday.

Thanks for your contribution to the blog!  Hope that helps you think about this trade FOR YOU.

Mike Bellafiore

Author, One Good Trade (Wiley)