Don't buy it here, but wait for a pullback. Are you familiar with that piece of sage advice? Or what about "I would wait and sell on a bounce"? What does this really mean? Where and when do you act? Here's one technique for calculating retracement levels using that tried-and-true favorite Fibonacci ratios, as well as using momentum to define the trend.
Markets trend in a zigzag manner:
rallying, leveling off, and surging
again, only to be hit by a
wave of profit-taking before settling
into a trading range, awaiting
the next reason to advance or retreat. This activity
carries on in the general direction of the trend, easily
seen on a price chart. Technically, the trend should be
considered up as long as the market unfolds with a
series of higher lows and higher highs. Similarly, the
trend is considered down if the price action is a series
of lower lows, with lower highs before each new low.
A market is considered not to be in a trend if the price
movement manifests itself in a series of fits and starts
or if it fails to sustain levels beyond the previous
extreme points, often reversing and forming the range.
During an uptrend, good traders will buy the pull-backs,
positioning themselves with the trend, taking
advantage of the marketís tendency to ebb and flow.
When the market is in a downtrend, however, the strategy
is to sell rallies, awaiting for the downtrend to resume.