How do you find the right buy point for a stock? Well, the short answer used to be that you add 10 cents to the most recent high in a well-defined chart pattern.
But that changed last June. IBD jettisoned the 10-cent cushion for some important reasons.
Market and stock valuations are not what they once were. While 10 cents was a significant addition to a $10 stock decades ago, it does not move the needle much on a $100 stock today.
There's other reasons for ditching the 10-cent margin.
Using it can lead to a bit more cost. A 10-cent buffer also isn't applied to alternate buy areas such as trendline entries or bounces off the 10-week moving average. Those can offer lower floors.
Also, in IBD SwingTrader, the 10-cent pad for buy points just does not exist, and many other traders find little use for it.
Finding The Buy Point In Tesla Stock, Other Leaders
Under the 10-cent margin, investors would add 10 cents to the most recent resistance level in the base.
For a flat or cup base it would simply be 10 cents added to the high on the left side of the base. For a double-bottom base it would be the middle peak in the base plus 10 cents. For a handle entry, it would be 10 cents added to the high in the handle area.
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So, if that point was 50 for XYZ stock, the proper buy point would be 50.10. Under the new thinking, 50 is the buy point, with a 5% buy zone going to 52.50.
The practice of padding the entry came into place decades ago, when fractions were abandoned in favor of decimals for stock prices.
IBD founder William O'Neil liked to see a stock rise one-eighth of a point over the most recent resistance level and used that as a buy point. To simplify this further, IBD rounded off 12.5 cents to 10 cents.
How A 34% Gain On Tesla Stock Began
Buy points can work exceedingly well. Let's look at a classic entry Tesla offered in April 2017.
Shares formed a cup-without-handle base. In this type of base, the buy point is easy to identify: The prior high (1), which made the buy point 287.30. In the old calculation, the buy point was 287.40.
Tesla raced past that level on April 3, 2017 (2). Volume was 156% above average (3), far more than the 40% minimum a breakout should have.
The EV stock rose 34% to 386.99 before falling below the 50-day moving average in July.
A trendline entry within the base would have marked a buy point around 275 with the March 28 gap-up. That lowered the cost, resulting in a gain of more than 40%.
Finally, by ditching of the cushion, investors can get the conviction that comes from simply following the chart patterns. Buy points now coincide with the "pivot" identified in IBD MarketSurge, our chart analysis and research product. That's just a fancy term for a buy point.
This article was originally published June 7, 2023, and has been updated. Please follow VRamakrishnan on Twitter for more news on the stock market today.
