Cold Hard Cash In This Chart?
The Dynamic Wealth Report
November 11, 2009
by Justin Bennett, Editor
As many of you know by now, I love to use technical analysis.
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”.
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There 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.
Let’s look at an example…
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.
Why?
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.
Take a look at what happened…
.GIF)
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.
***EDITORS NOTE: Although many consider technical analysis a “dark art”,
we’ve personally seen Justin use it to make a lot of money in stocks
very quickly. In fact, that’s exactly the reason why the owners of
Hyperion Financial paid a great deal of money to bring Justin aboard.
He really seems to have a knack for finding those short-term trading
opportunities that other traders miss. And the exciting news is, we’re
finally ready to launch Justin’s first trading advisory based
solely on
his unique technical set-ups!
So if you’ve ever wanted a professional trader to show you exactly how
to use charts and technical analysis to make insane money, Justin may be
your man! Keep a close eye on your email inbox
this Friday. The first
1,000 spots will be reserved for
Dynamic Wealth Report readers before
it’s released to the public…
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this market is essential to many small ranching operations.
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