When to Determine When to Buy a Stock

A trader should know when to open a buy order, just because the stocks market is bullish and stock prices are moving upwards it doesn't mean you can just buy anywhere. You need to know the art of where to open a buy order.

Consider this, the stocks market is bullish you come and buy at the top of the stock trend where the stock prices look so bullish that it creates the illusion that the stocks market will never retrace and if you do not buy now you will be left behind, only that just after you buy the stocks market immediately retraces 200 pips. This is not the art of how to buy. Even if the stocks market goes up and the stocks price returns to where you bought you are still not in profit, you have done zero work and you have just wasted your time. You need to know where to buy at the best stocks price and at the best time so that the stocks market does not retrace on you just when you have bought.

The chart below shows an upward trending market. It shows where most traders buy, most traders buy when the upward market is looking obvious, this is not where to buy, you buy when the stocks market trend is not looking obvious, this is when there is a retracement in the stock price. Always aim to buy after a retracement as shown below.

The art of this type of buying is that you buy after a retracement, therefore even if stocks price does not move up immediately, the retracement will already be played out halfway or 3 quarter way, therefore instead of you entering a buy which retraces 200 points as in the case which you buy at the top, you buy after a retracement therefore even if stocks price were to retrace on you it will only retrace a few points and once the stock trend resumes you will make profit much faster.

For example if you buy after the stocks price has retraced 150 points and the total retracement is 200 points, then you buy position will only retrace on you by 50 points instead of 200 points. And by the time the upward stock trend resumes and stock prices moves up 200 points to clear the retracement at this point you will be 150 points in profit, thus you will have saved time as well as by entering at the best point you will make money on the retracement. This is the art of buying if you want to make money when trading an upwards trending market.

The example illustrated and explained below shows where to not to buy and where to buy after a retracement, the buy was quickly confirmed by the moving average which started to move up and RSI went to above the 50 center line mark. Buying here after the retracement shows as a trader your position did not have a lot of drawdown and you started to make money immediately therefore making this a low risk trade.

Where to close buy orders

Knowing where to buy also means knowing where to close you orders & take profit.

For the above setup we will be using the RSI overbought signal. Once the RSI goes above 70 and then close below this level we shall consider this as a sell stock signal and we shall close all open buy orders.

And then wait for another retracement & open another buy order after a retracement and repeat this strategy.

We shall take a screen shot of this trade to show you where to close the stock orders after the stocks market moves up as these trade is real time at the time of writing this article.

Where to buy again

Because the stock trend is upward and we only buy after a retracement then as a buyer you would have waited for the setup to buy again & this is after a retracement.

This would have been best place to buy as this is the level where the current market is over-sold.

You can also wait for confirmation of the above signal as illustrated below:

Buy trade setup confirmed

What if a Trader Buys and The Retracement Continues Downwards?

This is a good question, what if where you buy is not where the retracement stops and the down move continues?

This trade did just that and retraced 200 points down from our buy point as shown below.

So the first thing to know is that this is an upward stock trend and the retracement has moved 671 pips from the top but using our strategy we have been caught by only 200 pips instead of the 671 pips. This is the first reason why you should not buy at the top and instead wait for a retracement then buy. That way you will only be caught by a fraction of the retracement and not the whole retracement, therefore saving you from a lot of drawdown on the trade.

The next step is that because you will not be over leveraging your trades you will still have enough money to absorb the drawdown. You'll then open a new trade after this retracement starts to move upwards as displayed above.

From the above trade setup our newly opened trade went up by 70 points immediately after opening this trade. As a trader you will need to close these new trades at the earliest times so that you can reduce your risk and at the same time book some profit amidst all the retracements happening.

For this trade our take profit will be set at 1144 or we monitor the stocks price chart and close this trade if the momentum of this trades starts to slowdown.

We shall take a screenshot of this trade after the stocks market trend has developed.

The buy stock trade was confirmed after there was a consolidation - both moving averages are now heading upwards & the RSI indicator is above 50. There was even a short term downwards stock trend as shown by the downward stock trend line that has now been broken.

As a trader you can see that using our strategy we have been able to reduce our drawdown despite the short term down stocks trend. Should the stocks market go up to where our first trade was then we shall have added profit to our trading account. The reason why we have added this profit will not be because that we were able to perfectly time the stocks market but because we have entered the stocks market when the possibility of draw down is very minimal. This means our risk reward ratio is high enough to enable us to extract profit from the stock market using this strategy.

The following area is where you close your trade, always quit while you are ahead & wait for another retracement to buy.

It is best to close trades here because the stocks market is a little overbought at this particular time. Close trade set a buy limit and wait for tomorrow.

Based on our trading strategy the best place to place buy limit would be at 1123 or 1122 or 1121 just above 1120.

Just in case there is a continuation of this bullish upward market, we also set buy stop order at 1136 just above most recent high that way our buy stock trade will still be opened either way.

The thing to remember is retracement before buy - the aim is to first reduce any amount of drawdown before starting to chase profit.

The next thing you've to be sure with this strategy is that the current long term stock trend is upwards, that way you are trading with the stock trend - you can use moving average cross-over technique on the weekly chart to do this.

The same concept of retracement before sell can be used to open sell stocks trades when in a downward bearish trending market.