There exists a sweet spot for entry that, if acted upon, will increase your chances for a successful trade. The sweet spot is a price pattern that can be exploited on a consistent basis. Prices tend to spring through these areas when they are penetrated, so knowing where they are and how to take advantage of them will provide you with a sharp advantage.
The sweet spot for a long entry is right above the previous day's high. (Refer to Table 11-1 for targeting your entry price for longs and shorts.) The previous day's high is the shortest-term measure of resistance that, when broken, often results in a burst of momentum, clearing the path for further gains. (See Chapter 6 on the previous day's high and low.) The advantage of waiting for a stock to cross above its previous day's high before going long is that you are assuring that the short-term trend is positive. A move above yesterday's high suggests that the sellers who took a stand have succumbed to the stronger buying force of today Once broken, the previous day's high turns into a new price support, and provides you with a floor for a tighter stop-loss point.
The sweet spot for shorts is right below the previous day's low. The previous day's low is the shortest-term measure of support. If you are trading from the short side and you wait for prices to cross beneath yesterday's low, you are assuring that the short-term trend is negative. Yesterday's low marks the point where the buyers took a stand and were able to push back the bears. A move below that line represents a victory for the bears of the current day, and represents new price resistance. A break beneath the low point means further lows are in store.
When a stock moves above the previous day's high or below the previous day's low for the first time, you have confirmation that two other powerful daily trend and entry indicators are in your favor. The two other indications that the short-term trend is in your favor are the net price and the opening price signal. (See Chapter 6.) The net price is a short-term measurement of a stock's health. It displays how the market players in that stock at any given time have rated the stock compared to the previous day's price action. A positive net price is equivalent to a green light. A negative net price is equivalent to a red light. Your probabilities for success increase when you trade in the direction of the net price. When a stock crosses from positive to negative or negative to positive it provides an excellent signal for further momentum in that direction.
The opening price signal is an even shorter-term measurement of a stock's health. It rates a stock on how it is trading when compared to its opening price. A stock that is trading above its opening price indicates that the short-term trend is positive. A stock that is trading beneath its opening price indicates that the short-term trend is negative. The best scenario is to have both the net price and the opening price signal pointing in the same direction that you want to trade from. When the opening price signal changes sides on the day for the first time it provides a trading signal that a further move is on the way.
As a day trader, it should be your goal to act quickly when your risk-reward ratio for a profitable trade is the highest. This ratio is the highest when the net price, the opening price signal, and the support or resistance levels are in your favor. These three conditions will always be in your favor when prices initially break through the previous day's high or low. If you can enter just when these support or resistance levels are pierced—the sweet spot—your chances for success increase dramatically.
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