Heading back to late 2020, or early 2021, we have been hearing don’t buy at high, and it will crash, don’t buy at high. But the big players have been making money ever since. So what is your take on buying something at a lifetime high? We say it can be profitable, it can be loss-making. It all depends on the trader or investor. In today’s blog, let’s decode the concept of buying at lifetime highs.
Know How Much Steam Is Left?
You should complete your due diligence before buying a stock or even an index at the all-time high point. And by due diligence, you should check out how much up move potential is left in the underlying security.
The best method we use at Trading Cafe India to find out the actual strength is price action and its correlation with RSI. Do you, too, want to learn such advanced price action? Join our new mentorship program.
Before buying a stock on all-time high levels, check if the RSI aligns with the price movement.
Here, you can see the weekly chart of Dixon Technologies. It’s been an outstanding stock and has given more than double-digit returns to the investors. But if you didn’t check correctly and brought the store at its all-time high, then chances are that you might be at a loss…!!
In the above chart, the price had constantly been at a loss, moving up while the RSI was crashing down. Moreover, you wouldn’t find this RSI divergence on the daily chart but the weekly one. So there’s another pointer – you will have to check up indices and stocks on multiple time frames to take lucrative trades.
Take, looking another example of Tata Elxsi, a highly bullish stock, check the correlation of price with RSI.
In the picture above, we can see that the price moved higher and broke its all-time high price. Now, you could’ve brought it here, and at present (27th August 2021), you might be sitting on hefty 60% gains…!! So what is something that gives us the conviction to go long at the all-time high level? The RSI…!! Note that when the price moved higher, RSI was also rocketing from 60 to 85 levels.
Waiting For The Retest Is Profitable
Many retail traders buy whenever the stock or an index breaks the high. The mistake they are making is – buying in an instant. If you want to become profitable by buying ATH breakout stocks, then you should wait for the retest to happen.
In the above chart, you can see that Tata Elxsi broke its ATH price twice and then made a retracement to the breakout levels. That’s when you should buy these trending stocks – when they are at all-time high levels.
Now, looking at Nifty 50’s daily chart, somewhere in early 2020, Nifty 50 made a new high and crossed the 12,400 marks for the first time. Many retailers blindly went long here. They made a grave mistake of buying calls and going long in futures, looking without waiting for a retest.
As a result, they were in more than 50% loss…!! That’s how important it is to wait for a retest after a breakout.
Again in November 2020, Nifty broke its ATH, and this time, it made a successful attempt at pullback and even got a partial break-away breakout…!! So if someone was fearful at this point and didn’t go long, they missed the opportunity of a lifetime.
For those who missed the opportunity, our kind Mr Market gave them another chance in 2021. First, Nifty made an all-time high and started reversing right after. After a long gap, it again broke the previous high, made a successful attempt at pullback. Nifty 50 even made a double bottom pattern and took up a flight in the onwards direction…!!
Even then, some so-called Market Moguls missed the rally of a lifetime. Why? Because they didn’t know how to trade things when they are at ATH…!! We are so glad that now you know how to trade ATHs…!! ????
Today, i.e., on 27 August 2021, Nifty 50 has again broken its new ATH. Will we get another opportunity? That’s for us to see, and Mr Market to tell..!!
The Word Game
Well, who said that you have only to buy calls at an all-time high? You can also buy puts at an all-time high and become profitable if you know the correct setup…!!
If you are a pro in trading and price action, you can make money by buying puts or selling in futures at an all-time high too…!! Aurobindo Pharma’s above chart, the price managed to break the ATH but failed to retest, so clearly, it was a fakeout.
Moreover, the volume of the stock was also falling while the price was hitting new heights.
So if anyone were a pro like our TCI family, they would’ve shorted Auro Pharma in the futures or brought its OTM puts. As a result, they would have seen tremendous P&L in their accounts.
Another thing that helps you sell at ATH and become profitable is Candlestick Patterns. Below is the day-chart of Bank Nifty when it hit the ATH around 37500.
The next candle to follow after the breakout candle was a Dark Cloud cover – a clear-cut bearish pattern. After that, a failed retest happened, and Bank Nifty started falling like anything…!! The confirmation for shorting was when Bank Nifty touched the resistance line and started its downward journey forming a double to kind of structure as well as lower high.
Now imagine selling at 37,000 and squaring off at 31,000…!! Well, that’s a lot of money on one lot…!!
Our motive is not to lure you into taking some trade, but to inform you that price action and data works if you know how to make it work…!!
The Bottom Line
So these were the price action secrets you need to know to become lucrative by trading stocks and indices at ATH. So, where are you finding your next opportunity? ????
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