TradingMarkets.com
Trading the Pullbacks: Key to Buying Low and Selling High
Friday January 4, 12:34 pm ET
By TradingMarkets Research


"When they are cryin'" goes the old trading saw, "you should be buyin'."

Easier said than done, reply the legions of stock traders looking at a Dow Jones that is off this morning by more than 190 points, and a Nasdaq nose-diving by more than 75. This, to be blunt, is what makes trading difficult. Not the set-ups, not the systems, not the technique -- heck, we'll give you the set-ups, the systems, the techniques in our TradingMarkets Path to Professional Trading course.

No, what makes trading difficult is a lot like what makes life, sometimes, difficult: finding the discipline to do what you know you SHOULD do when the time comes to do it.

Sometimes I wonder if people who aren't familiar with the TradingMarkets approach to trading read articles like my recent "Four Bullish Bets for Traders" and expect to see four stocks soaring to new highs. That's usually what people think about when they think about "bullish bets."

The only problem is that stocks that look like that are likely not bullish bets for TODAY. They were somebody else's bullish bets, days ago, bets made when the stocks probably did not look anywhere near as "bullish" as they do when they are moving aggressively higher.

I've said it before: traders are never more bullish when their stocks are moving higher. That is understandable, but it can be counter-productive when traders are looking to establish positions in stocks in the first place. As the trading maxim above suggests, traders should be looking to buy stocks when the market is fearful and selling them. There are caveats to this approach, of course, the most important among them being that we encourage limiting buys to stocks that are trading above their 200-day moving average. But it is a tried and true, quantified way to trade stocks -- and learning how to buy low and sell high could help make a major difference in your success as a trader.

We have just unveiled a new product, PowerRating Charts, that will almost certainly help people understand the basic philosophy behind PowerRatings, and how they help traders buy weakness and sell strength. There are four stocks that have high, in-the-green, PowerRatings on a trading basis as of this morning's trading. Let's take a look at one of them, BioMimetic Therapeutics (NasdaqGM:BMTI - News).

As the chart shows, BioMimetic Therapeutics had a low, in-the-red PowerRating for virtually its entire December advance. The darker, horizontal line represents the 200-day moving average, while the brighter, upwardly sloping line represents the 10-day moving average.

When did BioMimetic Therapeutics first become a high PowerRating, in-the-green, stock? Note that this happened in late December, as the market for BMTI slipped below its 10-day moving average. When the stock was at its most "bullish-looking" to the eyes of the average trader -- during mid-December -- the stock was actually at its most dangerous point from the perspective of a potential long-term trade. The extremely low "1" PowerRating was warning traders that BioMimetic Therapeutics was an increasingly poor risk/reward trade.

Now, however, the high PowerRating suggests that the risk/reward scenario for BioMimetic has changed completely. The stock has started to show the kind of weakness that savvy traders look for when searching for good, tradable stocks. By buying on weakness, traders stand a good chance of being sellers -- rather than anxious buyers -- when the stock again hits new highs.