DISCLAIMER: This entry method does not allow getting every cent of the move. If this is important to you do not read any further!

The how and why of entering a pullback trade can be tough for many traders. Although if the price is moving against the established trend it can have decent momentum. This makes it harder for traders to time an entry that want to “get in cheap” (find a spot with very limited risk).

I tend to classify my pullback trades into two distinct categories, Pullback and Pullback to a Level. In this post I will discuss entry for a Pullback to a Level. This is a trade where price approaches a level that I have identified. It could be previous support/resistance, 20 period MA, or the opening range. Once price gets to my level I want to start to drill down for entry. In teaching this type of entry to my students I tell them that I need the stock “to show me something in the direction I want to trade it”. This KISS strategy allows for easy identification of the risk in a realistic manner.

Let me illustrate:

Stock ABC a 60 dollar stock opens flat and within minute’s starts to weaken. The selling becomes persistent. On this steady selling the stock sells off for about $1.50 from the open in the first hour. Volume is only a little better than average and the market is essentially flat in the same timeframe. Because the stock didn’t have huge in play type volume, or make the percentage losers list it avoided coming to my screen early in the session. However, the sector it’s in starts to become noticed for its relative weakness and I find this stock. The stock has an ATR of over $2 each day. As I start to watch,  a low volume bounce ensues. This is a typical low volume bounce with the newly minted green bars showing much lower volume than the red bars on the way down.

The bounce didn’t come from an important level either. The first ½ hour opening range is about 50 cents off the low. This level is where I want to start to drill down for entry using the “show me” strategy.  I want the stock to “show me something in the direction I want to trade it” , in this case down. I am stalking a short entry here. Using the 1 minute chart I am looking for a swing high to be set around the level I have identified.  Then I need a lower high on the 1 minute to get short.

In this example the first swing high on the 1 min is about 58 cents off the low. Price retraces about a dime off that 1 min high and starts to move up. A couple minutes later it stops going up 5 cents short of the first swing high on the 1 min. Now in getting short off that lower high I have an easily defined out (my risk), of between 5 and 10 cents. My out is the fist swing high.  In calculating my target, a test of the days low is used. This makes my risk reward good and the trade is a go.

Most of this calculation is taking place before being in the trade since I know my target and how much risk I can give up in order for the trade to make sense. I needed to be able to find an acceptable entry point. Since I found the spot and the risk is easily defined and small, taking a loss if I’m wrong is automatic. The kicker in a pullback trade like this is that a test of the low still leaves room below if the stock just moves its normal daily range. This makes a 5 to 1 trade have an extra kick that could be a 10 to 1 trade.

This type of entry keeps my risk very small and allows for bigger size to be used. The “show me” guarantees at least a pause in the momentum the pullback had. If you are a new or struggling trader this type of entry can minimize the chance of that ripper or stepping in too early and not being able to accurately identify your risk.  This entry is using a low timeframe chart to read the tape. The  patience to wait for the entry to set up and not feel the need to call the turn and get every cent of the move by making the stock show some stutter step or hesitation gives a higher probability that the low volume bounce has ended.

If it continues and makes a new swing low on the 1 min or breaks the trend line off the bottom you have confirmation. Lower highs and lower lows on the 1 min will morph into the next higher time frames getting involved and helping your trade. Also any bottom pickers that tried to call the turn on the bottom now have to decide to hold or lock in profit on this stalling of price. Because it reduces the chance of the ripper and allows for accurate risk /reward planning, the KISS “Show Me Entry” should be in your toolbox.

Jeff Davis   @Shaq48_Trading