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The False bar stochastic trade can be used to buy pullbacks within an existing trend.
The first picture is an uptrend.
The trade is simple. Identify which way the trend is, up or down. If the trend is up,
there will be a black bar above the stochastic.
Then identify the pullback, trigger into the trade, and manage your risk.
If the trend is down there will be a false bar below the stochastic.
Buy Signal Sell Signal
Below I will show two false bar stochastic trades, one long and one short.
The first example is a long trade in RIMM. The weekly chart of RIMM triggered
long on February 4th. In the chart below, the original risk is highlighted in yellow.
The potential reward is highlighted in blue.
The reward target is reached when RIMM hits $140.
.
The weekly chart of Sandisk (SNDK) showed a potential short stochastic continuation
trade the week of May 12th.
Sandisk fell from $27 to $16 in about 7 weeks. Thats a 40% downward move with a
3.25 risk to reward. Quite a trade.
Now that we are triggered short, we do nothing buy manage risk. This trade worked
very well. The short trigger was $28.30 and the profit target was reached at $17.
Remember, always take small risks for larger rewards.
That is the basics of the pullback model. You can make a living trading by using just
this one model.
Other resources:
To scan for these set-up, see this post here.
http://esl.typepad.com/tradingtechniques/2008/02/stochastic-buys.html
The only other complexity I will address here is that of the complex correction. For
details on complex corrections click here:
http://esl.typepad.com/tradingtechniques/2007/08/wave-4-correcti.html