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Entries on Pull Back
  • : January 23, 2021
  • : B. Krishnakumar

Entries on Pull Back

After having conducted hundreds of webinars, online classes, and numerous interactions with fellow traders (new & experienced), I realized that there is an urge among many for low-risk entry and / or entries on a pull back which can offer a trade with relative less risk.

Such entries can be used to take fresh entries and / or for pyramiding. As you may be aware, the basic approach using Point & Figure chart or Renko chart is taking trades on some form of a swing breakout. So the entry is at slightly higher levels and the risk usually is typically 5-boxes or more in P&F charts.

This week, I will share a trading approach in Renko Charts which will offer low-risk entry on pull back. Have a look at the Laurus Labs chart in 3% brick size featured below.

Here is our broad framework for Entry / Exit:
  • Identify stocks in an uptrend in bigger time frame.
  • We use the 20 & 40 EMA to identify trend
  • Trend will be bullish if the 20 EMA is above 40 EMA
  • 3% brick size is used for trend identification
  • Entries will be taken on a pull back in lower time frame of 1% brick size
  • Entry will be taken when the price drops below the 20-EMA and gets back above the 20-EMA
  • There can be instances where the price can fall below the 40-EMA and then get back above 20-EMA. This is ok.
  • The trend should be bullish in 1% brick size when the trade is triggered. This is important.
  • Stop loss will below the recent swing low.

Have a look at the 1% chart of the same stock and identify pull back entry opportunities. Remember we will take long trades when the price falls below the 20-EMA and then turns back and closes above the 20-EMA. There were four entry opportunities in the last 8 months highlighted in the chart. Three of them were profitable and the last one was a small loser.

The moving average values and the swing low values will be known in advance. You can place entry & stop loss order accordingly. The exit could be either at a fixed percentage returns from your entry or you can choose to ride the trend. If you wish to ride the trend, then exit when 20-EMA falls below 40-EMA in 1% brick size. This happened after the last trade in the above chart.

In the chart above, the 20-EMA has now crossed back above the 40-EMA. The trend has therefore turned bullish again. Long entries may be considered when there is a pull back below the 20-EMA and a subsequent recovery above it.

Understand the logic behind this methodology is:
  • Presence of strong trend in bigger time frame or 3% brick size
  • We are trying to participate in such bullish stocks which are in the early stages of the uptrend in 3%
  • If the trend has been bullish for more than 6-9 months in 3%, there are chances of a deeper pull back in 1% and hence could result in a losing trade. This is like the last trade in Laurus that resulted in a loss.
  • Try to focus on candidates where the trend has turned bullish recently so that you can participate in the move if the trend sustains and the price moves up rapidly

Let us consider another example which could offer potential trade in the future. Here is the chart of Page Industries in 3% brick size.

If you notice, the crossover of 20-EMA above 40-EMA (trend turned bullish) happened few weeks ago. Keep this stock in your watchlist. You can get a potential entry opportunity in 1% brick size, when the price dips below the 20-EMA and goes above it.

You can run scanners to identify candidates, but I leave that to you. You can identify candidates which have dipped to the 20-EMA and turned around in 1% brick size. Those can be potential entry opportunities. But that is for you to sort out.

Understand the logic and you will realize that we are just using the concepts discussed in recent weeks about multi time frame analysis. The key here is buying the stock on a pull back and turnaround when the trend is bullish in bigger time frame.

Once you get the logic, you can frame different rules for trend identification, entry and exits.