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Here are my guidelines for finding best setups like these daily:
- stock should have range expansion on breakout day
- volume on breakout day should be higher than previous day
- day before breakout should be narrow range day or negative day
- pre breakout there should not be many big range moves or breakdowns
- stock should have linearity in prior uptrend before the consolidation period
- correction or consolidation should be orderly during the entire move
- volume during consolidation should be preferably orderly and lower
- stock should close near high on breakout day
Buy range expansion after a period of 5 to 10 day consolidation and an orderly consolidation. Orderly consolidations are low volatility periods where buyer and seller at equilibrium.
Buy range expansion preceded by low volatility period. A range expansion from that phase indicates fresh buying pressure.
Buy range expansion after a negative day. A range expansion preceded by a negative day indicates start of a fresh swing.
Buy range expansion after a narrow range day. Narrower the range better it is. Narrow ranges often lead to explosive moves on range expansion.
Buy range expansion after a series of narrow range days. That is even better.
Buy range expansion if stock is not up 3 days in a row.
As a swing trader, if you regularly buy stocks up 3 days in a row , you are likely to sooner or later blow up your account. The Professional trader buy on first day of the swing as soon as range expansion is signaled. Second day follow through id driven by residual buyers, newsletter followers or slow reactors. Third day is when many novice notice the move and get excited. the professionals sell in to that euphoria. They are happy with their 8 to 20% profit in 3 days and the third day buyer becomes the bag holder.
Buy range expansion early in a trend.
Say a stock is rang bound for 3 to 6 month and then it breaks out then that is a young trend. Buying proper momentum burst setups in these your trend first or second or third time works . But same stock when it is up say 6 month and trading near its high and all time high at some stage buying a extended move on that kind of stock will likely hasten your death as a trader. Even if you have to trade those kind of extended moves , ensure extremely good risk control and position sizing. As trends get extended they can become vulnerable to swing failures.
The most important thing to remember as swing trader is that always buy range expansion at beginning of swing move. That one rule can make you millions and save you lot of heartburn.
In order to find such stock setups daily scan for range contraction periods. From that list narrow your options and enter on range expansion day.
Stocks move in momentum bursts of 3 to 5 days .
In 3 to 5 days they can go up 8 to 40%
Lower priced stock make bigger moves
Lower capitalisation stocks tend to make bigger moves
Low float stocks tend to make bigger moves
High short interest stocks tend to make bigger moves
What tells you a momentum burst is starting
A range expansion signals start of momentum burst
Range expansion in simple terms is a day that is bigger than previous 3 to 5 days move.
A range expansion preceded by non momentum burst (where stocks was not up 8 to 40% in last 2 to 3 days prior to it) is good candidate.
How can one find these kind of days
By using any kind of range expansion scan.
4% breakout is one of the ways to find range expansion.
Dollar breakout is another way to find range expansion on higher priced stocks that move in 5 to 50 dollar move but may not have 4% b/o on first day of momentum burst.
4% breakout scan which I use is a momentum burst scan
c/c1>=1.04 and v>v1 and v>=100000
Gives you stock up 4% plus
that also has volume surge compared to volume a day ago.
and has volume above 100000
The scan throws a wide net . Just because stock is in 4% b/o it is not automatic buy.
Once a candidate shows up you need to study the context of the setup and only select setup which indicate start of a momentum burst.
What to look for in a good momentum burst candidate
Based on our understanding stocks move in momentum burst of 3 to 5 days
one has to create certain guidelines for selecting candidate from 4% b/o or $ scan
First condition I look for is stocks should not be up 3 days in a row
Why
Because if stock is up 3 days in a row it has already started its momentum burst and entering it now is not a low risk entry.
Second thing I look for is stock should have narrow range day or negative day prior to breakout day
Why
Because that tells you stock was not in range expansion mode prior to breakout
Next thing I look for is relative smoothness of prior move.
Why
This is personal preference based on my study pf stocks that make longer term up moves. they tend to trade smoothly , have orderly pullbacks or consolidation and do not have too many shakeout moves. the prior b/o on them have worked
Why
Because given a choice I like stock that behaves in orderly manner. That reduces risk and marginally improves probability of success
Next I look for is young trend. A trend that is only beginning and is not severely extended . As far as possible first and second breakouts once a trend gets established are better. As trend gets extended probability of breakout failure increases.
Why this condition
Again to marginally improve the success rate.
These are some guidelines . If you use them 95% or more of 4% b/o gets eliminated.
It has been observed and verified that stocks move in momentum bursts during bullish periods in indexes (bull markets).
During “established” downtrend (bear markets) in index they show same phenomenon on the downside. They go down in momentum bursts of 3 to 5 days.
In this kind of momentum burst move in a stock , the first day is range expansion which is immediately followed by follow through.
The sequence looks like:
Range expansion day
Up day (follow through)
Up day (follow through)
pullback
followed by end of momentum
That is the bullish sequence. Variation can be 5 day burst. In rare cases you will get a 8 to 10 day burst.
Sometime it will be variation of the 3 days with inside day or negative day after first day of range expansion.
There are many possible variations but essentially this is an impulse move of 3 to 5 day duration.
During this 3 to 5 days period stock would go up 8 to 20% ( lower priced stock can even have bursts of up to 40%).
Such bursts may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst.
This is a pattern and probability based trade.
It is largely mechanical way to trade for small profit targets.
Move starts with range expansion
All such momentum bursts start with a range expansion. The first day of the move is range expansion day. Often there is also volume expansion along with range expansion.
The price moves in the direction of range expansion.
When there is range expansion it attracts breakout traders, it attracts other momentum players, day traders, quants and so on. That results in continuation of move for few days.
Range expansion basically means a day which is up bigger than last 5 to 10 days bars. A range expansion preceded by series of range contraction days is good candidate in this setup. Moves preceded by orderly range contraction can be explosive.
A successful momentum burst will lead to immediate follow through. Say a stock breaks out in the morning, it will continue to go up through the day and will have immediate follow through in next 2 to 3 days. And the follow through should also be of big 4 to 5% plus magnitude on second or third day.
In most cases the momentum dies down in 3 to 5 days.
If you keep holding after the 3 to 5 days period, you would often see the stock ends up giving up all the burst gains and may not have another momentum burst for several weeks or months. Sometime the burst gains vanish intraday itself.
Depending on price of the stock such momentum bursts can be of 8 to 40% magnitude. Lower price stocks tend to make bigger moves.
For a stock trading below 5 dollars a breakout day move itself might be of 10 to 20% magnitude. For traders with small accounts that offers good opportunity.
As a practical matter if you have large amount of capital to trade with it is difficult to grow your account by just focusing on these low priced stocks. You might have to buy lots of 50000 to 100000 shares for meaningful difference to your account.
Lower float stocks make bigger moves. Low float and high demand creates explosive moves.
If you see in any year the most short term explosive moves will be on extremely low float stocks. For those with smaller account size there is distinct edge in trading low float stocks.
No specific catalyst is needed for these momentum bursts.
Why do these moves happen?
In some case there might be a specific news catalyst on day of first range expansion day , but in vast majority of these kind of momentum moves, there is no clearly identifiable catalyst.
However tracking news on daily basis might help you enter some of these momentum bursts very early and magnify your profit.
During bull moves in overall market such momentum bursts have been observed for over 100 years.
This is structural nature of market.
You should be independently able to verify this.
Stocks seldom run up or down smoothly.
A 30% move in stock over 3 months in a stock might be completed in 2 momentum bursts of 10 to 15% in just 5 to 6 days. Rest of the time the stock might retract or go in range.
In a year you will probably find 5000 to 10000 such 3 to 5 day setups when both bullish and bearish setups are combined.
Momentum burst kind of swing trading allows you to grow your account with very low risk.
For a mere 3 to 5 day exposure to market you capture the most explosive part of the move and you are not seating in dead periods holding stock waiting or anticipating a breakout which may or may not come.
Trading this kind of setup requires extremely good ability to ruthlessly cut losses if a trade does not work immediately .
It also requires skill to exit when things are still in explosive phase and not wait for reversal.
Per trade profit on these kind of trades will be on an average just 5 to 8% as you are only going to get part of the 8 to 20% move. By the time you enter on breakout day the stock might be up 4 to 10% , so you will not be able to capture that part of the range expansion move.
To trade this kind of setup you need to be willing to do 200 to 1000 or more trades in a year.
You make money by compounding these small gains.
So this is high frequency and low per trade profitability method.
There are periods in market where these kind of setups are prone to failure.
This happens near market turns where in short period lot of breakouts fail.
The bullish breakout trade needs to be avoided during fast selling phases in market.
The bearish breakdown trade works best after a downtrend is clearly established on 10 plus day time frame.
In a bull market trading 3 day bearish setups will lead to lot of failed breakdowns.
Because of the nature of the overall markets (they have significant positive bias), there are in number terms more bullish momentum bursts than bearish momentum bursts.
Once you understand this momentum burst based short term phenomenon, the next task becomes how to trade it by setting up proper procedure for it.
If you understand this market move and build your trading around it you can make money in market. Buy before momentum burst in anticipation or buy on first day of momentum burst.
