I get asked this question a lot when an asset is in trend or is setting new highs or lows: "Can I still get into the trade?" The answer is: it depends.
Here is the process I go through to make the decision, in fact, it is the process I go through for every single trade consideration.
I. DEVELOP THESIS
A thesis can be as simple as "I think this is going to continue going up/down. Or it can be event triggered (earnings) or macro driven (Debt deal done). A thesis can even be "Some idiot on Reddit said it was a good time to buy."
Anything can be a thesis, it doesn't matter. Because 90% of my ideas never make it past the next step, the most important step.
Timing the market is hard because most people don't know what it means. Timing the market is not getting in a long at the exact bottom or selling at the exact top, although I often AM able to do this.
Timing the market is looking at the chart and discerning if NOW is a HIGH PROBABILITY place to enter. That's it.
Always start with monthly, then go to daily. For every single trade or investment you analyze.
Find areas where price has:
Failed and reversed
Let's look at a few charts:
NVDA - is it still a buy??
First the Monthly:
Now the Daily:
So, what is easy to see on both is that:
Trading above the +2 Standard Deviation or 2SD
Risk is higher due to the gap
Risk is higher due to it being at 2SD
After Step II and you have completed Step III, you move to Step IV. For NVDA, you have two "strikes" already learned from the chart: the gap and the 2SD. Make a note.
IV. DETERMINE RISK and POSSIBLE REWARD
This is the step that really matters. Here we look closer at the Daily chart and define levels of previous Support and Resistance.
Determining Support and Resistance results in defining your Stop and Profit prices. It also tells you if NOW is the right time or if you should wait.
Back to NVDA. Let's look closer:
Green line is low of today. Yellow is the gap close. There are no other previous areas of Support (S) or Resistance (R) because of the price moves.
Therefore, to answer the question of if you should be a buyer? Go to Step V. the final step.
Now that you have the chart with S and R, Gaps etc., you now know EXACTLY what your STOP would be. You also know if NOW is a high probability moment to get in.
STOP: A daily/weekly close below today's LOW
TIMING: Since there is one bar, entering tomorrow at the open is HIGH RISK of a stop.
However, the stop you would take would not be that bad, unless it reverses the entire move.
Therefore, you know exactly where your Stop is, you don't know the target though. This would be a trade with trailing stop then.
BUT you then have to decide if you want to take the risk.
IF YOU ARE THE TYPE THAT DOES NOT RESPECT STOPS THEN NOTHING I HAVE SHARED WILL HELP YOU. PERIOD.
VI. DETAIL and R
If you decide you want to enter the trade, you have a couple of final steps:
What product you will use - Stock? Option? ETF with exposure to NVDA?
Then you need to compute Risk to Reward. NVDA would be difficult because you don't really know how high it can go. When this occurs, you take your expected entry price and subtract the Stop price and then you have your MAX LOSS.
Normally you would have a target defined by a previous S or R but not in this case.
In this case, you would take your Max Loss and multiply by 2. Take that price and see if you believe it can get there.
NVDA closed at $379.80 today and the stop would be a daily close below 366.45. It's fine to add a couple of extra pennies. 379.80-366.44 = -13.36.
Therefore, your reward target is twice your Risk, 13.36 * 2 = 26.72
Add that to the current price and you get your Target of 406.52.
So, if you think it can get there, you enter, if not, you don't.
DO NOT DO TRADES WHERE YOUR R IS LESS THAN 2 or rather, where the possible reward is not twice what your risk is. PERIOD.
Take a look at the short side though. Much easier trade to see but still high risk:
A close below $366.45 might get a Gap close all the way down to 307.04. Your Stop would be a close above today's high, 394.80.
STOP: 366.45 - 394.80 = -28.35 or -7.7%
TARGET: 366.45 - 307.04 = +59.41 or +16%
R = 59.41/28.35 or 2.09R.
My point is that if you wait, price will make the decision for you. It either closes higher or lower than today's high or low. Entering before that is HIGH RISK and lower probability.
My setups WAIT. I wait for confirmation. In this case, I would have to wait to see which way price closed tomorrow or even the next day - until it broke today's range. NVDA is not a typical setup I would take.
Let's look at QQQ:
3. Closer Look:
We can skip to Step IV:
Monthly: next area of resistance is the yellow line - 371.24
Daily: next area of resistance is the same yellow line (look left)
Closer: next area of resistance is the blue line - 336.71
Closer: next area of support is the purple line - 332.82
Todays close was 335.39
I am not going to tell you the next steps. Take the info above and compute the Stop (Support), the Target (Resistance) and the R.
Let me know what you come up with and if you think now would be a good time to enter this in-trend trade.
FINALLY: I hope you see how easy this makes decisions. It removes emotion, it removes bias. It is entirely based on price data and R. It's why you never see me being stressed about trades.
Remember, In-trend trades are not my bread and butter; reversal trades are. And reversal trades are higher probability.
Have a good evening,
Ladies and Gents. And RegEx.