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Look to three days ago (see 1 on figure). Its high should be higher than the next two days and its low should be lower than the next two days. |
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Then look to two days ago (see 2 on figure). Its high should be higher than the last trading day and its low should be lower than the last trading day. |
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Look to the last trading day (see 3 on the figure). It should have the lowest high and the highest low of all three days. Again, this is classic consolidation. |
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How Do You Trade the Wedge Sell? |
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You set an entry point at 1/8 below the low of the last trading day (see 4 on figure). This is to be certain that the old low has been ''taken out," which indicates that the sellers are ready and willing to move the stock lower. |
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You set your initial protective stop (IPS) 1/8 above the last day's high (see 5 on figure) because you do not want to breach that resistance level. |
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If that is too big of a risk for you, you may choose to set your IPS 1/8 above the high for the current trading day. In either case, you set this IPS to give enough room to withstand one more "charge" by the buyers before the sellers take firm command. |
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You set your exit target at a point either 3 points below the entry point, or 50 percent of the average daily range below the entry point, whichever is greater (see 6 on figure). |
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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 short sell. |
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Review Figure 13.8 for the results of the wedge sell. The trading day opened with this stock actually moving higher at the open, but it soon fell back to your entry point where you executed your short sell. The stock continued to move downward, although there was a small rebound near the end of the day. You held this position overnight. |
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The next day, the stock opened lower and moved sharply lower. You exited at your target price very early in the day for a 3-point gain. The stock actually moved another point lower, but you were already on to other trades. |
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