Cold Hard Cash In This Chart?

| November 11, 2009 | 0 Comments

I can easily find short-term trading opportunities with low risk and high relative reward.  By putting money to work in these opportunities, money is moving to where it’s rewarded best… in stocks and ETFs about to make big moves.

Why leave money in a stagnant stock or ETF that isn’t technically set to move higher?

If you’re a dividend collector, that’s one thing.  But leaving your money tied up in a stagnant stock or ETF and “hoping” for it to go up won’t get you far in the trading world.

“So what is a technical setup based on this type of analysis?” you ask.

That’s a great question.  Here’s the answer…

When you look at a price chart, you’re actually looking at the collective actions of all market participants.  It can be long term investors, short term traders, or even day traders.  Their buying and selling activity shows up in the charts.

All of these market participants are human (or computers programmed by humans) and subject to human tendencies.  They’ll do the same thing over and over again trying to make money.  By market participants interacting with each other, markets can develop what we call “behavioral patterns”.

Here are many patterns in the markets.  But some patterns have a higher probability of going one direction over another.  Find these patterns, learn how to trade them, and you have yourself an edge over the market.

Here we have the Biotech iShares Trust (IBB).  It’s an ETF focused on the biotech industry.  Notice the sloping blue line.  This line shows a short term uptrend in the IBB.  Now find the red line.  This is the $70 resistance area for IBB.

You can see how IBB traded around this $70 zone for most of June.  In late June, IBB traded above $72 for a short time and then pulled back to the blue trend line and the $70 support zone.

Once IBB hits the blue trend line, it’s a great place to enter a long position.


Because you have an edge.  The probability of IBB continuing its uptrend is higher than it breaking down.  If IBB breaks below the trend line, the trade will not have worked.  It’s a low risk entry with a high reward to risk ratio.

I call this technical setup in IBB a “step-up”.  It’s a behavioral pattern that repeats itself over and over.

As you can see, IBB exploded from around the $70 level to over $80.  That’s a return of 14% in less than a month, or 280% on an annualized basis.

More importantly, over time you got a return of around five times your risk.
So what exactly does that mean?

Let me explain…

If you bought 100 shares of IBB at the $70 trend line/support area, you’d have a risk of a little over $200 for this trade.  How?  By setting a stop loss at $67.90, you limit your downside risk to $210 ($70-$67.90= $2.10 x 100 shares= $210).

After buying at $70, IBB traded up to $80.  By selling at $80, you captured $1,000 of cold hard cash ($80-$70= $10 x 100 shares= $1,000).

You risked $210 to make $1,000.  Your reward to risk ratio is nearly 5 to 1.  Then all you have to do is find that same pattern again and repeat the process.  It’s not hard to see what’ll happen to your bank account once you do!

And remember, this isn’t the only pattern you can make money on.  Quite simply:  there are a number of patterns that have a high probability of success.  Pay attention to price action in the charts and you’ll start to notice these patterns again and again.

Tags: , , , ,

Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

Leave a Reply

Your email address will not be published. Required fields are marked *