Author: KIMBERLEY KOENIG
Source
If you are an IBD CAN SLIM student, you know you should buy at the precise buy point to maximize profits. But if you missed it, can you still get in? And when is it considered too late?
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When a stock breaks out of a base and hits a buy point, it is often a precursor to a big run-up. That’s the ideal time to buy for optimal gains. If you miss the exact entry point, there’s a 5% window of opportunity above that price in which to get in, often called the 5% buy zone.
It begins with the buy point and ends 5% above it. Once the stock goes above the 5% range, it is considered “extended” — too late to buy.
This 5% range gives the investor a chance to buy at a lower-risk price. It allows wiggle room for normal pullbacks to the buy point, without triggering a sell rule and getting you out prematurely.
When a stock hits a buy point and breaks out, it may trade sideways or test the new level by pulling back to the buy point, or even below it a bit. Sometimes, stocks pull back to the 10-week moving average. This is a normal correction, as the price settles in to the new higher level.
How To Buy Stocks: Waiting A Day Can Make A Difference
If a stock drops 7%-8% below the buy point, it triggers the defensive CAN SLIM sell rule, limiting your losses before they get too big.
A normal pullback to the buy point from an extended entry would be a lose-lose situation. The farther away from the buy point you enter a trade, the bigger the percentage loss would be if the stock goes back to the buy point.
The 7%-8% loss-cutting rule would shake you out before the stock got back to the buy point. You would have to buy back the stock or risk missing out on potential future gains.
Let’s look at a Tesla (TSLA) breakout from November 2020.
The EV stock hit the 502.59 buy point of an 11-week base on Nov. 19, according to MarketSmith pattern recognition. The buy range went up 5% from there, or to 527.72.
Shares stayed in the buy zone for three days, until Nov. 24. If you waited to buy just one day later at the 574 closing price and Tesla pulled back to the buy point, you would be down 12.4%.
How To Buy Stocks: Buying Late Can Force You To Sell
This drop would have triggered the 7%-8% sell rule, forcing you out early in what was just a normal pullback.
Tesla hit 900.40 on Jan. 25, gaining 79% from the buy point in two months, with only minor pullbacks.
You can see how buying at the precise entry is key to a winning trade.
Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.
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The post How To Buy Stocks: Why The 5% Buy Zone Is A Sweet Spot appeared first on Investor’s Business Daily.