Buy The Dip Sell The Rally Strategy
Hello traders, welcome to the stock trading course and the fourth module short to medium stock trading. It is the lesson I’m going to teach you the second strategy of the module. And this is as simple by the deepend [SP] cell the Raleigh strategy but it’s not as simple as that because we are going to be using quite a bit of technical analysis and price action knowledge, but we are going to use this strategy to trade stocks or shares of companies that have released earnings on the pre-market and we have seen a surge in price or a selloff in price and we are also going to use this strategy to trade stocks that have moved a lot at the open.
Okay so here we are and we are looking at the Halliburton one minute chart and well and the first of all let me tell you the point of this strategy, basically the point of this strategy is to monetize on big moves at the open okay. The reason we want to monetize the big movers at the open is because sometimes well most of the time when we have big moves at the open the move is going to continue for at least a part of the trading day, in a very strong matter. Here we have a great example okay, what we’re going to be using is the daily open, the previous daily close, the pivot point and volume we are going to be trading price action here.
Lets go and have a look at this Halliburton chart, you can see we have a gap that didn’t get filled and then we have a surge in bearish movement. We closed at $39.26 and opened at $39.03 okay so that’s a twenty three cent gap and then we moved all the way down to this low at $38.65 so we went through the thirty nine level like butter and we moved all the way down to the $38.65 level and then we started to retrace up.
Now this is where it starts to get interesting, just take a look at this volume bar okay, everything is about volume guys. Take a look at this volume bar, this red volume bar it’s huge but what happened here, price didn’t move in fact we made a doji candle okay when this bar appeared and this can mean one of two things. One the bearish pressure was contrasted by bullish or by buyers at this area or that that this is in fact a retracement and you can see that we have a drop in volume on an ascending pattern.
So what we’re going to do here is we are going to be trading this retracement okay, and let me just put a couple of trend lines right here, we have one right here and we have another one right here so this is kind of a rising wedge and what we’re going to do is we are going to go short right at the $38.80 level. This is a pretty round number, we have a pivot point and we have this ascending pattern which is a continuation pattern.
So we are going to take our short position here at the $38.80 level and we are going to be risking about 10 cents on this trade okay, eight cents is fine. I mean if we go above this above the pivot point and above the spike high well we can be out of the trade so we are going to be risking 10 cents on this trade, nine cents is fine also. And we don’t know yet where we are going to be taking profits, let me just make this a little bit larger.
And right here is our trade, we are going to be short at the $38.80 level which compliments with the daily pivot and a drop in volume okay. This is what we are going to be looking for. Always look for a drop in volume on a corrective move. Why? Because a drop in volume in a corrective move means that this is in fact a corrective move and we are not about to turn around.
So we got short and we see that price well, first of all we see a spike in red volume which is good for us and we see price start to drop. Now we are not going to be trading our stops like we did on the previous strategy but we are going to use price levels to trade off of. Okay, so the first target should be the $38.40 level which confluences with the daily support one but you can see that this candle actually closed below and well this candle doesn’t have any wicks on it which means this is pure bearish power.
So we are going to hold our trade through this level so when we hold our trade through this level and when we hit the $38 level we are ready our forty two cents in the money. And with a $10,000 dollar account we can short sell two hundred and thirty shares of Halliburton which means that we are about a hundred dollars in the money on this trade so right now we are going to move our stops to break even and ideally a little further and we are going to continue.
Our real targets should bet he $38 level well not a real target but we are looking at the thirty eight level and the reason we are looking at the $38 level is because it’s a very round number and most likely we are going to find buyers here or we are going to find traders who are going to be covering their short positions just like us. So we what we’re going to do here, we are going to target the $38 level and because our first target got cleared the second target should be the $38 level okay.
Now what we’re going to look at here first of all is to hit, when price hits the $38 level we are eighty cents in the money and with two hundred and thirty shares that would mean that we made one hundred and eighty four dollars in this trade in seven minutes. Now we hit the $38 level and right here we have an inverted hammer and then we have, well we have a change in volume and then a spike in red volume.
When the red volume spikes we see what the candle is and we see that it is a doji, that is a clear signal to get out. Why? Because even though we had a big surge in red volume, price did not close below the thirty eight level so we did find some buyers here, we covered our position for a one hundred and eighty four dollar profit. This is one example of selling the rally okay.
Now let’s have an example on buying the dip. Okay now here we have the Twitter one minute chart and what we’re going to do here we’re going to be buying the dip, you can see that we have a surge in volume, boom! We can’t be actually be trading this move, it’s insane because this move is about a ninety cent move in one minute so we are going to try to trade the continuation of this move. What we’re going to do is wait for a retracement back to the daily open which is the blue dotted line on a green volume spike.
Now what I’m going to do I’m going to get rid of this part of the chart because what this volume is doing is not letting us look at the rest of the volume chart quite well so we are going to zoom in and there you go. Now you can see that price here was trading in this range and we had a surge in buy pressure right here but this is not a clear entry and the reason this is not a clear entry is because first of all this low or this spike low, even though it hit the $30 level which is a very nice level it broke with a previous low okay.
But it held the $30 level so it can be considered an entry but I’d rather look at this entry right here. Price moves all the way to the $30.50 level then comes back down and when it comes back down we have a shift in volume and that is what’s interesting here, the shift in volume at the daily open.
So what we’re going to do is open a long position after this candle closes and you can see that we have drop in red volume and this is another key for entry. One the shift in volume at the daily open lowering red volume. So what we are going to do is we’re going to open a long position right here and put our stops below the $30 level and below this spike.
Now we are going to target the next pivot level right here so we are risking twenty four cents to make seventy one cents or 2.35%. So with a $10,000 account we can buy three hundred shares of Twitter and risk twenty four cents to make seventy one which means that we are making $213 on this trade and risking only $72 these are the kinds of trades we are going to be looking when we talk about buying the dip or selling the rally. We are going to be looking for a retracement in lowering volume to a key level to get our perfect entry with a great risk to reward and remember you can trade Twitter with a CFDs and if you trade Twitter with CFDs you can buy even more shares of the company.