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Trading Tip 4 - Are You A Reversal Or Continuation Trader?

There are 2 ways to make money trading the stock market. You either buy low and sell high or buy high and sell even higher. 

Knowing which suits you better can make a difference in your trading career.

Some traders like me can do both. That's because we have trading strategies for each.

But some traders especially newer ones should start by focusing on one.

The Reversal Trader

The reversal trader is the one who likes to buy low and sell high.

They scout the stock universe to find a stock that has stopped dropping.

Once they sense that the stock is about to reverse and go higher, they will buy the stock.

For example, a stock may drop from $40 to $30.

The reversal trader sense that the stock is about to go from $30 to $40. Thus he or she buys the stock when it trades at $31. When the stock reaches $40 he or she sells it.

Some chart patterns that reversal traders play are:

  • Double Bottom
  • Triple Bottom
  • Doji
  • Bottoming Tail
  • Reverse Head and Shoulders
  • Break a downtrend line

The Continuation Trader

The continuation trader does not look to buy in near the bottom.

Instead he or she will find a stock that has run up.

Then they will seek to discover whether the stock will continue to go up even more.

For example, a stock may run up from $30 to $40.

The continuation trader thinks that the stock will move up from $40 to $50. Therefore, he or she will buy the stock when it trades at $41.

When the stock reaches $50 he or she will sell it.

Get it?

The continuation trader buys high and sells it even higher.

Some chart patterns that the continuation trader will trade are:

  • Ascending triangle
  • Consolidation breakout
  • Pennant
  • Flag

Start By Analyzing Your Psychological Mindset

Which type of trades you take and will thrive on depends on your psychological mindset.

  • Are you always the type that prefers to buy low and sell high?
  • Do you mind buying a stock at a high price and then selling it even higher?

Some people find it very difficult to buy a stock that has run up a lot. Therefore, you should focus on reversals.

Some people don't like to buy a stock that has drop a lot. Then you should focus on finding stocks that are in an uptrend and will continue to go even higher.

The Reversal Trade

The chart above shows how a reversal trader might trade a stock.

STOR has been falling a lot and then it broke above a downtrend line. The reversal trader can buy the stock and sell it higher.

The Continuation Trade

For a continuation trader, he or she might spot a stock that is in an uptrend like AAPL.

They see a consolidation breakout and ascending triangle and buys the stock and sells it higher.

Which type suits you more?

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