Our Trading Experts Member David had a Game Plan for TREE and we felt it would be a good lesson on how/when to buy into support that could help you.
The Game Plan was :
Stock : TREE
Entry : $102
Stop : $98.99
Target : $109
Trade Setup : Bull Flag
Reason for Entry : Buying near support
His stop vs $99 would be the same area we would put it ($98.99) since TREE held that area the last two days, and 3rd time is the charm. Meaning if it gets down there again, it's probably heading lower.
When you look at the bigger picture of TREE on it’s daily chart we can see $110 is clear resistance, an area myself or Shake would buy the shit out of. Since you, me Shake and anyone who can read a chart can see that resistance area as clear as day.
When you look at $102 you can see how $102 is really meaningless in the bigger picture other than having been the high from 2 days back. Risk reward wise, buying into support gives a much better RR than me buying the breakout at $110, however you have to remember the probability of the trade working. I could say confidentiality that above $110 TREE's heading to $123 based off the flag it's been putting in, however I don't know when, this is the main reason why Shake and I use "buy stops" to trigger us in "when" it goes.
Above $110 there is no real resistance when currently, anyone trading this name or in it, is going to have orders all over the place. People are selling at $103, $104, $105 etc so it's a much more choppy and less clean trade. Look at OKS for example, once that broke $44.50 (for TREE would be $110) no one really knew where OKS was going to go, we had a plan of $46+ and got stopped out at $45.99 after going to $47, however anyone in the stock didn't really know where resistance was since it’s breakout. In the chop of this flag, every figure (whole dollar) is going to be a battle ground. $104 is going be a pain in the ass, $106 is going to be tough, there will be some Mutual Fund with a million shares on the offer at $108, and some Billionaire playboy who wants to brag about selling his stock at $110 who will chase as it breaks out, and that's when we want to be in!
So when/if you are buying into support, it works best when it's the most scary. What do I mean by scary?
The Scariest is the first time, when no one knows it’s support yet, until after the fact. The people who buy on the way down, are the "Hero Traders", 9/10 times they’re rookies who pick a price expect to buy it and the stock immediately is supposed to reverse because they’re in. We all were those guys at one point, don't be a contra trend trader. For that one time you catch the lows, you tend to sell it much faster and miss the real move.
The Retest of those lows, or what is called a "Double Bottom" has the best probability if you like to buy into support. Classic Example below:
Sure if there are triple bottoms, quad bottoms etc, sure. However after that 2nd retest the probability of it holding gets smaller and smaller. Why is that? Think of it this way, if the stock is strong and everyone is buying it then why does it keep coming back down support? It's doing that because the buyers are weak and the sellers are strong, so the more times it comes down to support the more likely buyers are going to fold and get out of the way and either join the party and sell or just watch their P&L go red.
Buying into Support can be smart If
- You know the probability is not in your favor
- Know when to get out
- When the trade works you really need to be getting 5/8/10:1 risk reward out of the trade
- You have balls
Do we buy into support?
Sure, however it's usually pretty light, to build into a position. We’re never betting the house on support holding because when it breaks it's fast and painful.
Do you have balls?
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