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How Do You Trade the Wedge Buy? |
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You set an entry point at 1/8 above the high of the last trading day (see 4 on figure). This is to be certain that the old high has been taken out, which indicates that the buyers are ready and willing to move the stock higher. |
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You set your initial protective stop (IPS) 1/8 below the last day's low (see 5 on figure). You know from back testing that there is support at that price, but you do not want to breach that level. |
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If that is too big of a risk for you, you may choose to set your IPS 1/8 below the low for the current trading day. In either case, you set this IPS to give enough room to withstand one more "charge" by the sellers before the buyers take firm command. |
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You set your exit target at a point either 3 points above the entry point, or 50 percent of the average daily range above the entry point, whichever is greater (see 6 on chart). |
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Then you wait to see if your entry point is reached. Once this stock has traded at that price, you send your order to buy. |
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Let's look at Figure 13.6 for the results of this trade. The price opened below our entry point and proceeded to trade even lower than our IPS (notice the wick below the main body of the candlestick). At that point, the buyers became active, driving the price up above the open to your entry point, at which point you entered the trade. Within about three hours, the stock had reached your exit target and you closed out the trade for a 3 3/4 point profit. |
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In Chapter 15, we discuss various exit strategies. One of these is to hold onto your position beyond your exit target when the stock shows strength. Had you done that in this case, you could have taken even more profit. |
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This is a consolidation breakout to the downside. Review Figure 13.7 to be sure you can identify the setup and the pricing points: |
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For the last trading day (see 3 on figure) the closing price is below the 20-day moving average. This is your clue as to direction. You are expecting the price to break out to the downside. |
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Confirm consolidation over the past three trading days: |
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