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There are a number of stock trading patterns that your can find on the stock charts that can be used to enter a stock with a low amount of risk. If you are a trader, keeping the risk on a stock trade as low as possible is required for your success.
Traders should ask themselves at what price would they exit a position, even before taking a position. Using trading patterns that minimize the risk of loss should be of paramount importance.
Five trading patterns that provide low risk entry points are the following.
1) Inside narrow range bar on the daily time frame is a price bar that shows the least amount of volatility relative to recent price action. Typically, low volatility trading is following by high volatility trading. Volatility can be used to the trader's favor by entering a stock just as it starts show signs of increased momentum. Using an inside narrow range bar, a trader would take a position, either to the long side or the short side, once the previous bar's high or low is exceeded. A stop exit order below or above the previous bar's low or high, depending on the position, would ensure a relatively low risk trade should the stock not move favorably.
2) Resistance and support patterns occur as a stock reverses at a previous significant high or low price. Most traders think of support and resistance at a fixed price. Support and resistance also occurs along a trend line. Trend lines mark the extreme highs and lows in a continuing trend. Using support and resistance in trading requires being willing to active decisively once a support or resistance level is reached. Support and resistance levels that are broken in a decisive manner, can then be used in the opposite manner. For instance, a previous support level that is broken to the downside can become resistance to any future rallies.
3) A pullback for trading purposes occurs when a strongly trending stock gives back some of the recent price gains for a number of trading bars. For a buying opportunity, a strongly trending stock that makes at least three consecutive lower highs is a setup for resumption on the underlying bullish trend once the stock trades above the previous high. Conversely, for a sell short opportunity, a stock that makes at least three consecutive higher low is a setup for selling short once the stock trades below the previous bar's low.
4) Stocks that make a trending move that matches a previous price move will often reverse once the matching move is complete. In Elliott Waver theory, this often looks like an ABC move where the first leg of the move, the "A" leg is the same move as the "C" move either in percentage or absolute price.
5) Retracements that give back 50%, 38%, and 62% of the previous price movement will often reverse at those price levels. Fibonacci theory indicates that those price levels are significant. Combined with other standard technical analysis tools, reversals at these percentage levels can result in profitable trades.
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