Trade Set Up

I want to talk about a trade set up that I see play out numerous times in my trading. I am talking about buying previous or two day lows in a strong stock that might show some short-term intra-day weakest (reverse for shorts).

I generally identify the set up as, strong stock with weak close and a weak open. This generally leads the stock to open weak/lower to test the lows of the previous day; which gives you opportunity to buy support (I must stress that you are buying support in a strong stock, reverse for shorts)providing you with tremendous risk/reward probability.

Below are two charts one from NTAP during yesterdays trading and the other is SLW from Friday Setp. 10, 2010. As you can see in both cases the stocks are strong (determined by the daily and hourly charts) and either pullback or had a weak closing price that was followed by a weak open. In both trades the stock traded near or at the previous day lows and then had a tremendous bounce for most of the morning trading in the direction of the order flow on the higher time frames.

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