<br />
When stocks go up quickly, they will usually pullback for 3 to 10 days when profit-takers lock in their gains. And then after this resting period is over, such stocks will many times continue their up trends. I have learned that one of the best ways to trade stocks is to identify strongly trending companies that have pulled back and are poised to resume their longer-term move. <br />
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One of my favorite methods of capitalizing on the tendency of trending markets to pull back is called "l-2-3-4s" because the setup takes four days to complete. Days 1, 2, and 3 develop a countertrend move in a rapidly trending market. Day 4 is the day that you go into the trade. I like to jump on these stocks as the move begins, and then stay with them for as short as a few hours to as long as a few days or weeks.<br />
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Here are the rules for this short term trade. First, you want to identify a strongly trending stock. This can be done by using the Relative Strength rankings on the TradingMarkets.com site or in Investors Business Daily. Ideally, you want to trade stocks with RS rankings of 95 or above. Next, you simply wait for the stock to create a three-day pullback, particularly right after a short-term high. This means that right after making a short-term high, the stock will make three straight lower lows, or a combination of lower lows and inside days. (Inside days are days when the high is less than or equal to the previous days high and the low is greater than or equal to the previous days low). <br />
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As I've noted, three-day pullbacks are a common phenomena in strongly trending stocks. The important question is, how should you enter the market in these situations? For up-trending markets, enter a long position on Day 4, 0.10-0.20 above the Day-3 high. <br />
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After I enter a position, I always protect myself with a stop under the Day-3 low. For example, if the Day-3 high is 42.25 and the low is 41 .50, buy the stock on Day 4 at 42.35 to 42.45 and place a good-till-canceled (GTC) stop order near 41.50. I do this to minimize my losses if the stock were to go against me. Pullbacks feature fantastic trading opportunities, but if you do not use risk control, the best entry method in the world won't help you at all.<br />
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Another great aspect of l-2-3-4s is they are great for shorting the stock market"which is something all successful traders need to know how to do. From 1982 through 1998 the stock market went up a most of the time, giving birth to a generation of "buy only" equity traders and investors conditioned so believing this was the way the market worked and always would. Unfortunately, while many of these long-side-only traders may have profited during this unusually long bull market, they will get decimated in a bear market. This is not a prediction, it is a fact.<br />
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Ive learned firsthand that you need strategies that are profitable in declining markets as well as rising ones to successfully trade stocks in the long run. This means shorting stocks. For example, you can also l-2-3-4s and other pullback strategies with weak strong stocks. You simply invert this concept to short weak stocks. All you do is identify imploding (declining) stocks and wait for them to rally a few days. When they begin to resume their longer-term downtrend, they become solid short-selling candidates.</div><div class='uawresource'><div style='font-style:italic;' class='uawabout'><br />
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