When a stock has been on an upward trend and the price of that stock drops, it's called a pullback. Because the shares are likely to continue on their upward trend, buying stock pullbacks is an attractive move for investors. Buying stock pullbacks allows investors to take advantage of temporary weaknesses in the stock. The process is not as easy as it sounds, however, because it does require a little research before making the buy.
1. Examine the daily charts for the stock you are interested in so that you can identify the pullback. Charts are available from your brokerage platform. When looking at the charts, you need to identify a series of ups and downs where each up in the chart is higher than the previous one. The downs are the pullbacks.
2. Check for news regarding the stock to determine why the pullback occurred. Often, a pullback happens when a member of the company management retires or if there is hype surrounding the company. Unless the news is something that could have a negative effect on the company and the stock price, you should have a fairly safe investment.
3. Contact your broker, if you use a traditional broker, or log into your online brokerage account, if you manage your portfolio on your own.
4. Set up a buy-stop order for the stock at a price slightly higher than the value of the shares right before the most recent pullback occurred. This allows you to wait out the buy to determine if it breaks resistance and continues to rise, making for a safe investment.
- Trading For Dummies; Michael Griffis, Lita Epstein
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