Buying weakness and selling strength is the art of buying pullbacks.
Currency pairs that are in up trends will pull back offering a low risk buying opportunity and currency pairs that are in down trends will rally offering a low risk shorting opportunity.
As a swing trader, you have to WAIT for these opportunities to happen because…
Doesn’t it make more sense to buy a currency pairs after a wave of selling has occurred rather than getting caught in a sell-off?
Absolutely! If you buy currency pairs then you want as many sellers out of the pair before you get in. On the other hand, if you short a pair, then you want as many buyers in the pair before you get in. This gives you a low risk entry that you can manage effectively.
Buying pullbacks and shorting rallies
Where do you buy a pullback and where do you short a rally? You buy them and short them in the Traders Action Zone (TAZ). Here is an example on the long side:
This is how you can buy in strong up trends after a wave of selling has occurred? Ok, now here is an example on the short side:
Now you can see how you can short/sell after a wave of buying has occurred.
When going long, wait for the decline into the TAZ and when going short wait for the rally up into the TAZ.
Are all of them created equal? Nope. You have just a standard pullback like in the example above and then you have…
The first pullback
These are exactly what the name implies. It is the first one after a change in trend. How do you identify a change in trend – when the 8 EMA crosses the 21 EMA? After that happens, you look for an entry when the stock gets into the TAZ. Here is an example:
This is the most reliable type of entry into a stock and this is the likely area where institutional money is going to come into the stock.
If you only trade one pattern, this should be it! You can get into a stock at the beginning of a trend, at a point of low risk, and you can take partial profits and ride the trend to completion! What more could you ask for?
Oh yeah, speaking of getting in on the beginning of a trend. This next setup fits neatly into my wave pattern…
First pullback after a breakout
There’s one other type of pullback worth mentioning and that is the first pullback after a breakout.
If you are looking at a chart that is trading sideways or forming a basing pattern, and it suddenly breaks out of the pattern, you can look to buy the first pullback after the breakout.
This also gives you a low risk entry into a chart that will likely continue the current trend.
Here is an example:
Most traders are going to buy breakouts. The word breakouts sounds so exciting, doesn’t it.
The problem with buying breakouts is that it is hardly every low risk. Think about it. If you buy a currency pair when everybody else is, then who is going to buy the currency pair after you get in?
Also, consider this the majority of breakouts fail and return (pullback) to the breakout point!
Forget buying breakouts.
Step away from the crowd.
Wait for the breakout buyers to get scared and sell. This sets up the pullback that you can get into with much lower risk and higher odds of having a successful trade.
Remember to save money and money will save you.