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A key part of knowing how to buy stocks involves finding the optimal price to initiate a new position.
If you're familiar with the IBD way of investing, then you probably know about proper buy points. But when looking through chart patterns, you may find yourself saying, "Imagine if I got in earlier."
Nailing the bottom every time is impossible. But earlyentrieshelp you split the difference between buying at the absolute bottom and buying as the stock confirms strength by breaking out from a proper buy point.
To start, when considering a stock, we want to buy as it breaks out from a proper point of a base such as a cup with handle, double-bottom base or flat base. We may also consider add-on entries, like buying as the stock bounces from its 21-day exponential moving average or moves above a three-weeks-tight pattern.
But since waiting for theseentriescan mean leaving behind a good part of a stock's advance, you also haveearlyentries.
How To Buy Stocks Using Trendlines
When a stock crosses above a downward-sloping trendline, thiscan be used to buy shares in theearlystages of a powerful move.
Trendlineentries work best with stocks already forming proper bases. They can be found by connecting a stock's recent highs. The more price highs that your trendline touches, the greater your chances of success.
Ideally, you want a minimum of three points connecting your trendline. Often, the first is the base's left-side high. If the stock crosses above your trendline in strong volume, it could be a signal to buy.
Another type ofearly entry can be found using a horizontal line drawn at a resistance level. This one works similarly to the downward-sloping trendline. But instead, you're using a recent point of resistance in the base, and drawing a straight line to find your entry point, rather than a downward-sloping line.
Early Entries: Buying The Upside Reversal
There's also the upside reversal. These tell us that there's solid demand for a particular stock. Sometimes this action can also provide an early entry.
An upside reversal occurs when a stock sells off, then bounces back and finishes higher on the session. A stock may open lower on disappointing earnings news or a downgrade, but battle back to close higher. This action is even more bullish if it takes place in heavy volume.
Upside reversals are a sign of strength in moments of adversity and are particularly noteworthy when they occur at moving averages such as the 50-day or 200-day line.
We don't always need to sit around and wait for a stock to break out from a proper entry before getting in. It may be smart to start a small position just to test the waters at anearlyentry, then add to your position as the stock confirms strength with a breakout.
Earlyentries provide a great way of starting your position at a lower price. And when the stock pulls back, you're left with a bigger cushion and won't get stopped out as easily.
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