Using this technique with IPO an entry is signaled with the close above the count back line at 6.63. The count back line is based on end of day data, so the signal is given at the end of the day’s trading. The trader takes an entry on the next day of trading. Sometimes we get a better entry price, and sometimes we have to pay a little more. The count back line provides the trigger point for action.
Once the trade is opened, it is useful to manage it with a CBL stop loss until the trend is well enough established to track with other tools, such as a straight edge trend line or moving averages. Until it is possible to apply these tools, the trader’s focus must remain purely on the money management aspects of the trade.
The count back line can be used to set a trailing stop loss and trigger an exit when a trend starts to decline. Taking the most recent highest high in the current up trend, the stop loss point is calculated by counting back three lower bars. The horizontal line drawn at the bottom of the third bar is the trailing stop loss point. The line suggests the conditions where the trend may be weakening. When used with open profits, it provides an exit signal to protect those profits.
Some IPOs give very rapid buy signals, or tell the traders clearly to stand aside from the market. The count back line entry technique is applied as a stand alone trading tool until other technical analysis indicators can be used. These include straight edge trend lines, and after the required number of days, tools, such as moving averages, or indicators, that use moving averages in their calculations. This includes stochastic and MACD analysis.
The count back line technique lets us understand what the market is telling us about the value of the IPO. It allows the trader to establish the direction of the short term trend, and any changes, or reversals. When combined with a stop loss technique, the trader is able to protect trading capital, and later as the trade develops, protect his profits. We use market activity to trade the IPO with a lower level of risk.
While it is true that we miss the action in the first few days, and might surrender some good profit, it is also true that we reduce the risk of jumping on board a sinking IPO. Not all IPOs are tradable. We need to find those that will make us money. This volatility method tells traders if the IPO can cling on to the gains or face defeat. We want to find a strong uptrend that will live so we can prosper. Unless the IPO gives a clear buy signal, it may be a good idea to stay out of the market and wait for more definite opportunities.
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