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Key to understanding anticipation setup

Friday, January 18, 2019 5:47

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Understand volatility and range cycles…

Momentum burst leads to Volatility expansion. During this phase stock quickly makes a 8% to 40% move in matter of days.

Consolidation or volatility contraction follows some of these breakouts, while some momentum burst fade and reverse.

Fading momentum burst move is what mean reversion traders build their setups and trading around.

When stock instead of fading after momentum burst forms orderly consolidation or in other word has volatility contraction , it gives us good anticipation setup.

Such orderly volatility contraction periods have high probability of following through in direction of momentum.

In anticipation setup our scans try and identify such consolidation or volatility contraction periods. We put orders in anticipation of breakout or enter as soon as stock starts to breakout.

You want to find the consolidation or volatility contraction phase and enter at an interface between contraction and expansion. Not too early or too late.

When a momentum burst is followed by such contraction you get a good risk reward trade. If momentum fails to show up you get stopped out for small loss or break even.

In a strong trend move or longer duration trend move , momentum bursts followed by Volatility contraction followed by momentum burst happen several times.

You want to find the consolidation or volatility contraction phase and enter at an interface between contraction and expansion. Not too early or too late.

Range Expansion, range contraction, Range Expansion, range contraction. that is the cycle. If you understand that you will be able to find anticipation setups.

The more you do it better you will become at it. There are some tactics and nuances to make this cycle work.

Selecting a stock with ultra high momentum is one as against a slow moving stock. We want to trade for magnitude and not momentum. That way you get most bang for your bucks as the trade quickly moves in your favor and also makes more explosive move in short period of time compared to slow trend.

Lot of success in this setup is also function of trading tactics like pre planned entries, types of orders, stops placement , moving stops aggressively, profit harvesting and so on.

It takes time to develop and fine tune to the tactics and execution part of the equation. But once you do it you can find hundreds of profitable trades in a year.

Source: http://stockbee.blogspot.com/2019/01/key-to-understanding-anticipation-setup.html

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