When you compile a list of potential trades, youâ€™ll probably encounter a handful of stocks that will fail to live up to your expectations.
Youâ€™ll see busted patterns and fake-outsâ€“or even the occasional stock that just wonâ€™t play by your trading rules.
But what you donâ€™t know is that these â€śbroken tradesâ€ť can sometimes lead you to your biggest gains. You just need to know how to switch gears and play the trades the market gives you.
Today, Iâ€™m going to show you two techniques you can use to pull extra profits from these broken trades.
The methods might seem counterintuitive.
But they really do work.
You simply have to approach the market with an open mind and expect the unexpected.
Technique No. 1: Reversing a failed breakout
Hereâ€™s the scenario:
Youâ€™re watching a stock with a clear resistance zone near $45. If it closes above this mark, the stock is a buy. Notice the series of higher lows and our resistance line on the chart:
But what if the stock fails at resistance and moves lower? Most traders would forget about the stock entirely and move on to other opportunities. Thatâ€™s because they only considered a long position. They quickly forget that a major failure at resistance can set up a great trading opportunity in the opposite direction.
Hereâ€™s how a move like this one could play out:
Our potential trade failed to break through resistance near $45. After its initial drop, the stock once again attempted to move higher toward resistance. It failed just above $43 (red arrow) and moved lower.
Thatâ€™s your cue to short this stock. By taking the opposite side of this trade, you would have been able to book substantial gains.
You simply need to wait for confirmation that your initial guess was wrong (in this case, we guessed the stock would break above resistance and move higher). You are then left with a high-probability short that would have paid off in just a couple of weeks.
Technique No. 2: Flipping a pattern trade
For this example, I want to show you a potential trade thatâ€™s shaping up right now. For this set-up, weâ€™re going to move beyond the world of stocks and check out the spot price of gold:
After a powerful, multi-year run higher, gold topped out around $1,900 late last year. Since then, the yellow metal has been slowly forming a bearish descending triangle that I have illustrated above on the weekly chart.
But support has been very strong at $1,550. So if gold attracts eager buyers and the price pushes above our descending resistance line, we could witness a powerful upside breakout. Itâ€™s an overlooked fact in the charting world: a bullish breakout of a bearish pattern (or a bearish breakout of a bullish pattern) can lead to an even bigger move than if the pattern broke out as expected.
The only reason many traders donâ€™t play them is because they canâ€™t reconcile the unpredictable nature of the markets and their initial analysis. They are so set on the original bullish or bearish outcome that they fail to act when the market gives a clear-cut signal in the opposite direction.
But if you keep an open mindâ€“and prepare for multiple outcomes from every single one of your potential tradesâ€“you can book consistent profits just when your fellow traders are giving up and moving onâ€¦
Source: The Penny Sleuth