How to use range expansion to swing trade | stockbee


How to use range expansion to swing trade

LITB: LightinTheBox Holding Co, LTd is a recent Chinese IPO. This stock last week offered a good opportunity for a quick swing trade. The trade made 14% profit for holding the stock for just one day.

14% profit in one day on LITB

Stocks move in momentum bursts of 3 to 5 days. That is a recurring phenomenon on any stock, but is more pronounced on momentum stocks. Stocks might spend lot of time being range bound but when they move they move in momentum bursts moves.

These 3 to 5 day momentum bursts typically are of 8 to 40% magnitude. Lower priced  stocks make the more explosive moves. Stocks with low float make explosive move. All such momentum bursts of 3 to 5 days start with rage expansion.

If you can daily scan for range expansion you will find many such opportunities. Not every range expansion candidate is a buy. The context of range expansion is important. If the range expansion is preceded by a period of range contraction and a momentum pause, then it is a good setup.

In case of LITB , it showed up on my range expansion scan. The entry was 17.25. My target was within 10 cents of 20. That was around  approximately 14 to 15% profit potential. Next day stock gaped up and traded as high as 20.06 before giving up part of the gains. I exited 75% at 19.93 and rest was stopped out at 19. All in all trade made 14.19% in less than 24 hours.

They key thing to understand if you want to find these kind of stocks is the momentum burst phenomenon.

Stocks move in momentum bursts during bullish periods in indexes. Stocks exhibit momentum bursts of 8 to 20% during this period( lower priced stock can even have bursts of up to 40%). Such bursts may or may not have clear identifiable catalyst.

All such momentum bursts start with a range expansion. The price moves in the direction of range expansion. Range expansion basically means a day which is up bigger than last 5 to 10 days bars.

A successful momentum burst will lead to immediate follow through and the momentum dies down in 3 to 5 days. Depending on price of the stock such momentum bursts can be of 8 to 40% magnitude. Lower price stocks tend to make bigger moves.

During bull moves in overall market such momentum bursts have been observed for over 100 years and traders have developed breakout methods to trade them as they offer good risk reward setups.

Some traders try and anticipate such bursts and enter in anticipation . 

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