Trading Education: PACS in Action – Nov 22, 2011

Today I’ve decided to give a tutorial regarding how to use Price Action Cheat Sheet (PACS). My objective is to teach and give readers a better understanding how PACS work. I will be doing this by sharing some trading examples. So here we go…

Let’s start with the recommendation I wrote yesterday. This is what I said “Lastly, watch also IP and ICTV. They are potential buys with low risk.” Now if you immediately bought two stocks  into the open without studying and understanding deeper what my statement means then am sure you are now half smiling and half frowning (ICTV went up while IP went down).  Again I can’t emphasize enough the importance of checking PACS before implementing or acting on a trade. Guys please remember that PACS will always act as the final arbiter. Let’s now look at closely what happened in yesterday’s trade.

Note that before the opening bell, ICTV’s buyers were already lining up and bidding the price higher. This price action tells us that there is already a lot of interest coming from traders who were willing to pay higher just to acquire the stock. This is another encouraging sign that should have been taken into consideration.

So there were the alert I issued and then the higher opening price. They were all pointing towards a potential buy signal. The determining factor came when ICTV started trading above .44. Remember that based from yesterday’s PACS (posted above), a buy should be initiated above .44 level.  When ICTV started to trade at .45, there was already a confirmation to buy.

I know some of you might be also be thinking that PACS works well only on closing and not on intraday trades. Just like what I already mentioned, there were already potential buying signs at hand (gap up, alert issued and confirmed break point). We don’t want to wait until everybody bought before we act.

Some of your next question will probably be…”What if the breakout failed to hold and stock fell back below .44 level again?” That is the beauty of PACS, we know that our breakout point was above .44 and therefore we will also have an idea where failure will occur. Since a price move below .44 is considered as a failed break then we are expected to act accordingly and cut immediately. Having this knowledge still puts readers to an advantage over the rest of traders because we have a reference point to use to decide decisively of where to cut. This helps us manage our risk.

Let us now compare ICTV with the other stock alert that i made which is IP. The stock also opened higher at 2.00 (previous close was 1.98) but after opening, it immediately started to tumble. Based from above PACS, the “bullish confirmation” column where a buy should be initiated is above 2.07. IP never reached that price therefore the alert which was to “watch IP for a buy” never materialized.

I hope you guys were able to learn something today. I will continue to educate readers more on how PACS can be effectively utilize in trading.