Using Technical Analysis in Timing

Tactics on Breakouts: Anticipation or Reaction?

The trader is forever faced with the dilemma of taking a position in anticipation of breakout, taking a position on th breakout itself, or waiting for the pullback or reaction after the breakout occurs. This situation is an example of how trading multiple positions simplfies the dilemma. The trader could take a small position in anticipation of the breakout, but some more on the breakout, and add a little more on the corrective dip following the breakout.

The Breaking Of Trendlines

This is one of the most useful early entry or exit signals. If the trader is looking to enter a new position on a technical sign of a trend change or a reason to exit an old position, the breaking of a tight trendline is often an excellent action signal.

Using Support and Resistance

Support and resistance are the most effective chart tools to use for entry and exit points.The breaking of resistance can be a signal for a new long position. Protective stops can then be placed under the nearest support point. For purposes of placing protective stops, support and resistance levels are most valuable.

Using Percentage retracements

In an uptrend, pullbacks that retrace 40-60% of the prior advance can be utilized for new or additional long positions. a 40% pullback after a bullish breakout might provide an excellent buying point. Bounces of 40-60% usually provide excellent shorting opportunities in downtrends. Percentage retracements can be used on intraday chart also.

Using Price Gaps

Price gaps on bar charts can be used effectively in the timing of purchases or sales. After an upmove, underlying gaps usually function as support levels. Buy a dip to the upper end of the gap or a dip into the gap itself. A protective stop can be placed below the gap. In a bear move, sell a rally to the lower end of the gap or into the gap itself. A protective stop can be kept over the gap.

Combining technical Concepts

All of technical concepts used together would improve the timing of the trade. The idea is to buy near support, but ot exit quickly if that support is broken. Violation of a tight down trendline drawn above the highs of a downside reaction could also be used as a buying signal. During a bounce in a down trend, the breaking of a tight up trendline could be a shorting opportunity.

Combining Technical Factors and Money Management

Besides using chart points, money management guidelines should play a role in how protective stops are set. A closer protective stop would permit the taking of larger positions. A looser stop would reduce the size of the position. It’s critically important that the protective stop be placed over a valid resistance point for a short position or below a valid support point for a long position. The use of intraday charts can be especially effective in finding closer support or resistance levels that have some validity.