Trading Opportunity

Reaction back to the support after buying signal from a formation

Theory: When a price formation is broken, this often means the psychology of the market actors taken as a whole is in a special mode. This can for example be that many are sorry they did not buy earlier, or that many are sorry they sold too early. In general, we can say that when a resistance level is broken, all sellers which (perhaps due to fundamental reasons) were on this level, will be gone. So, the sell-side is gone, while the buy-side is still there. When a buy signal from a formation is given, this then often causes the price to rapidly rise further. It may then be difficult to buy at a good price. Sometimes, however, there is a reaction back after a formation break. This gives buyers a new chance to get in on the stock, and this time to a good price. It is also possible to invest with a low risk if one sets stop loss just below the support from the formation.

Score: With ideal trading opportunities like this, the price has almost, but not completely, reached the price target of the formation and has then reacted back to a level relatively close to the support from the formation. A lower score is given if the price already has reached the price target before it reacts back. A high quality of the formation, meaning that the formation is very similar to a theoretically perfect formation, results in a high score. The size and age of the formation, meaning how long ago it was broken, also contribute to the score. Volume balance and correlation between volume tops and price tops is also important for calculation of the score. If the price has been below the support line after the break, this is seen as negative. It is also negative if other formations have been formed after the break.

Buying price: Is set to the support of the formation and a little up (about 20% of the height of the formation).

Price target: Is set to 90-125% of the price target from the break of the formation.

Stop loss: Is set to 20% of the height of the formation below the signal level of the formation, i.e. 20% below the support of the formation.

Tidshorisont: >From 30% to 60% of the formation's length. The same percentage is used for all types of formations, even though the signals from rectangles are reached quicker than signals from double-bottom formations and inverse head-and-shoulder formations.