Once again, this post is just me thinking aloud, and it is not meant as investing/trading advice to anyone else.
Consider the following chart where a 1-month low has been flagged. (The ticker doesn’t matter, and it could have been any of dozens of others.)
By now, evryone knows what to do with such a signal. So let’s advance the chart by one day to see how things unfold.
Surprise, surprise. Rather than the expected ‘red’ Smiley Face, the flag is ‘green’. But the inferrable signal is the same, “Buy at tomorrow’s open.” So, let’s write the order and see how things play out by advancing the chart another day.
Opps. We got clobbered and ended the day down on the position. So, what happend? Note the candle from two days previously. The move down was greater than the average for the month, but it was done on no more than average volume, suggesting not much conviction. So, possibly, a reversal could be expected, which happpened the following day , and that reversal was reversed on the day after that in a retest of the prior low.
Said another way, what appears to be a breakout often fails once or twice or three times until buyers do overcome sellers and move prices higher. Stan Weinstein talks about this in his book and suggests that them who consider themselves ‘investors’ should always expect a retest of the low, and that they shoul wait for it to happen before putting on their position. Those that consider themseves ‘traders’ could act on what appears to be a breakout, but they should put on only half their position.
So, let’s advance the chart another day.
That’s a pretty weak signal. But let’s take a chance on it and buy at the open.
Bingo! In at 17.12 and closed the day at 17.51.