Intraday trading ranges naturally grow and compress over time as market participants compete for directional control or when a trending security draws a flood of buyers and sellers. A single day’s price bar ending near the intraday high or low might contain a plethora of information that diligent traders can utilize to make lucrative buy and sell choices on occasion.
These large range bars, which display wider-than-normal ranges at critical market crossings, may corroborate substantial price moves, such as a successful or unsuccessful test of a moving average. At other times, they may indicate a dramatic increase in momentum, with one side yielding and enabling a trending security to rush higher or down swiftly due to the removal of the friction of competing positions from the system.
Furthermore, true breakouts and breakdowns should produce at least one large broad range bar since the security is breaching a readily visible barrier, such as a trendline or horizontal resistance level. As a result, a significant number of market players should be encouraged to come off the sidelines in an emotional act that results in higher-than-average volume.
Failure to print a high-volume broad range bar during a breakthrough or breakdown, on the other hand, creates a significant divergence that warns us to keep an eye out for a reversal that traps the trend-following crowd. While the bar does not have to print on the day of the breakout or breakdown, it should be included in the larger collection of price bars that comprise the rally or sell-off wave.
Expansion Bar Signals at Moving Averages
Price movement into the 50- or 200-day exponential moving average (EMA) offers unique circumstances for broad range bar signals, which traders may utilize to enter or leave the market at the appropriate moment, depending on the result. However, patience is essential since the testing phase may take many weeks, during which price bars congest as bulls and bears compete for dominance. This struggle may generate several signals, with bars extending away from the moving average at higher-than-normal volume before reversing gears into another test.
Each expanding bar contributes to an underlying theme, which finally results in either a prolonged reversal that sustains the trend that existed previous to the test or a sustained continuation move that breaks the moving average. The complexities of this testing process, as well as its several iterations, may trick inexperienced traders who leap on each broad range bar only to get whipsawed in the other way.
When using expansion bar signals, look for a volume rise that indicates elevated emotional levels. Furthermore, a 5,3,3 Stochastic indicator increases outcomes after lengthy testing, with the astute trader looking for the last shove to coincide with a bullish crossing for a rally and a bearish crossover for a collapse, ideally coinciding with overbought and oversold levels.
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When real estate major CBRE Groupground through three tests at the 50-day EMA in a four-month period, it’s simple to see how expansion bar signals may have benefitted your bottom line:
- In December, following a lengthy test, it rebounded at the moving average, recording the widest range bar in two weeks on growing volume, while Stochastics printed a bullish crossing at the oversold level.
- In February, it completed a successful 12-day test by gapping over the moving average on the greatest volume in eight sessions and recording the broadest intraday range in three weeks, while Stochastics printed a bullish crossing at the oversold level for the third time in three weeks.
- In March, it completed a six-week consolidation on top of the moving average with the largest range bar of the year, while Stochastics soared into overbought territory in a “Stochastics Pop” buy signal popularized by Jake Bernstein in his 1995 book “The Compleat Day Trader.”
The Bottom Line
Wide range price bars often provide crucial indications that traders may employ to make timely entry or exit decisions.
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