Many beginners try to find the bottom of the stock or when to get in and when to get out of a stock. You are always trying to find the lowest point however it is very difficult to find or catch the lowest point of a stock.
How does a stock move lower?
If a stock is moving lower, it is moving from its high and it starts trending lower and lower, usually in a wave type or a stair step pattern. As the stock is making these lower lows and lower highs, this is the trend of the pattern. Because stocks don’t go straight down and neither do they go straight up. Once this pattern reverses meaning the stock starts making higher highs and higher lows, you will see the trend start pushing upward and that is kind of where you start seeing that the stock has made its bottom. When you see the same type of time frame changing the stocks direction and changing its pattern.
So when a stock is going lower, it is making lower highs, and lower lows. Once it changes that pattern and it starts making higher highs and higher lows the bottom was in between that. Of course it’s tough to time that bottom or lowest point so instead what you want to do is catch the new trend of that pattern. So you want to catch were the pattern is earliest to change in direction.
When you are looking for the bottom of the stock, you are looking for that change in direction from making the lower highs and lower lows to higher highs and higher lows. That’s when the momentum has changed and you want to look at it in terms of the same amount of time.
So you could be looking at it for multiple days or multiple weeks and then look at the change in direction the same amount of time because stocks will go up and down multiple times within a single day. Depending on how long you are planning to hold your stock for is the amount of time you need to look at the stock. For example if you are looking to hold for a few months, you need to look at the pattern over a few months.
Once this new pattern starts to evolve, you want to get in as soon as possible but you don’t want to get in to early because if you get in to early the stock can continue to head lower. You don’t have to make this overly complicated, just keep it as simple as possible. It is very simple, is the trend going down, or is the trend going up. That is the easiest way to find your bottom and when you get in is right after the stock has made its bottom or consolidation pattern.
Usually stocks are healthier when the consolidation pattern is forming after it has gone down for a while. It consolidates or goes sideways for a bit and then it continues to move higher. This is a healthier type of move. If a stock goes down and just bounces back up, typically stocks will go back to lower levels if they do crazy bounces like that.
This is how you can find the bottom of a stock, use it to your advantage, look for those A-B-C-D patterns and use them to your advantage in your trades.