First off.. because the recent low is $2.20 away from the current price ($22). I also know the markets often trend is smaller up/down waves and I believe I can increase my profit potential by trading with limit orders (expecting a pullback). This would be my plan for the entry trade..

Order #1 - Place a BUY LIMIT order @ $20.90 for 300 shares
Order #2 - Place a BUY STOPLIMIT order @ $22.50 for 300 shares
Both of these orders would be placed in an OCA (one cancels all) group - meaning the first order that executes would cancel the other.

Why did I place the order like this? The first order expects XYZ to pullback - thus reducing my risk in the trade and increasing my profit potential. If this order gets filled, I'll have only about $1 risk for the trade.

If not, the other order (which is $0.50 above the current price) may get filled. This order is basically a "fail-safe" order to allow my entry if the market begins to run upward.

What happens if neither of the orders gets filled in the next few days?? This is when we would re-evaluate our trade decision and potentially alter the entry mechanism a bit. We may choose to simply "go in" with a market order (especially if the current price is below $22). Or we might adjust our two existing order price levels a bit. Either way, it is important to have patience and "let the trades come to you" - don't chase trades.

Assuming I got filled with my entry order #1, I would place my stop below $19.80 (at first). This is a support level that appears to be holding (meaning market price should attempt to stay above this level.

If I got filled with my second entry order, I would still use the $19.80 as a "key point", but I might now be able to widthstand the risk of almost $3 per share ($900). Another common method of placing stops (that I like to use) is to average the current three bars lows or highs. In this case (because we are trying to go LONG - we would use the lows (and include the current bar). Let's assume that value was $21.25. I would then feel comfortable with a stop level between $21~21.25 for this trade.

Everyone should understand that "individual needs and requirements" often dictate "how and where" you place your trades. I might trade a bit differently than others, but the theories I'm trying to teach you are universal, you just have to adopt "levels" that meet your needs.

Now, let's assume neither of my 2 entry orders got filled and I'm deciding to "jump in now" with a market order. The first thing I would do is go back to the chart and look at the current price action - obviously it did not come down enough to hit trade #1, nor did it go up enough to hit #2. So, it's kind of "drifting".

Thus, I could "jump in" and place a stop order (to protect my equity) at a level that I feel comfortable with. I know that $19.80 is support and I know the market is drifting a bit (but should continue higher). So, let's assume I "jumped in" at $21.65.. I might place a stop a bit higher than the $19.80 lows (to further reduce my risk.. also knowing if I do get stopped out, I could always get back into the trade again). Remember, this is a plan of calculated risk. XYZ has not run up yet, so we are attempting to contain our risk and plan for a future price move. So, let's assume I entered my stop at $20 - my risk is $1.65 (maybe a bit high for others, but remember.. our original stop loss was going to be about $3 - so it is much more "contained").

OK, this side of the trade we have not discussed much (yet). You know the stock came down from $40 to below $20 and is not back to $22 (or there about) . So, where do we place our profit target levels??

There are a few techniques that I like to use to help find these levels..

1. Use support/resistance levels to find locations where market price has stalled in the past. These can often be good levels in the future.
2. Find DOJIs on the chart.. These are other signs of support/resistance. So they can also be levels where the market may move.
3. Average the last 3~5 candle ranges and then multiply that level by 2 or three. For example, if the average range (high-low) for the last 5 candles is $0.62, then a decent (starting point) profit target would be $1.5~$2.0 (for short term targets.
4. Use Fibbonacci levels to identify potential price levels.
5. Use longer term charts (like weekly charts) to identify other support/resistance levels and trend channels. You might be able to find a level that was not visible on the daily or shorter term charts.

Now that we have a number of ways to find a profit target level and have already established our stops, we simply need to determine "what we want from this trade". Most of the time, it is best to pick something that is "reasonable" and not "totally unrealistic".

If my calculations are correct, we are risking about $1~1.5 for a potential gain of $1.5 or better. Not very good really, but still - lets assume we made the trade. Would you be happy with a $600+ gain in a few days/weeks if we were right?

Remember, we'll continue to re-adjust our stop levels as the trade continues. So, our risk will decrease over time. The PT levels can be re-adjusted, but I suggest traders pull at least 50% of their position at their original projected profit target levels - then let the rest run with a stop.