Using Multiple Time Frames to Find Entry Points
Sometimes the simplest strategies are the most powerful.
There are so many different trading strategies, chart patterns, and indicators that technical traders can employ to buy and sell stocks. These different strategies can be overwhelming at times and it is usually better to focus on a select few trade set-ups that work for each individual trader’s style.
One of my favorite trading patterns is the re-test. I like it because it is easy to spot; levels are clearly defined, it is fairly reliable, and it can often signal an intermediate term trend change.
The basic pattern consists of two steps: first, a trend line is broken, and second, that trend line is retested. It’s that simple.
I find the re-test easier to trade than breakouts since the re-test usually takes a few days to a few weeks to develop. This allows me to scan for this setup after trading hours when I’m less prone to the adrenaline rush of an open market. Moreover, it removes the feeling of needing to chase a breakout in order to “not miss out”.
By waiting for the re-test, you can also place your stop just below the low of the pattern and it will be much closer to your entry point than if you had bought the stock while it was breaking out.
It doesn’t matter what the original pattern is. It could be a triangle, diamond, inverse head and shoulders, an all-time high or just a range. So long as a trend is broken and retested, the pattern is valid.
For example, let's say a stock broke from it's highs, climbing nearly 10% in two days, then re-tested its breakout level.
This would have given you a good risk/reward entry for any potential upward move. Your stop could be placed just below the trend line break.
The re-test can also be used for shorting as well. Once again, a trend line is broken, and then re-tested. It is just reversed.
Let's say a stock broke down below it's lows and re-tested the break down a few weeks later.
Once again, the originating pattern is irrelevant, so long as a trend line is broken and re-tested.
The above examples assume daily charts for illustrative purposes, but this pattern can be used on any timeframe and still be a reliable pattern to trade. Shorter term traders can use a 30-minute chart, while traders who want to hold for longer periods of time can use a weekly chart.
The re-test trade may not be as exciting as catching the breakout on a stock, but it does provide a simple, easily recognized trade setup. The best thing about this type of setup is that it happens over and over, in all types of market conditions, and across all different industries and sectors. It is probably one of the most consistent types of setups in the stock market. You just have to be one the lookout for it and keep an eye on it when it happens so you know when to act.
As always, no pattern is foolproof. Every trade involves risk, and proper risk management should always be employed.