Monday, February 26, 2007

Late Night Thoughts

After spending quite a while on Stockbee's excellent blog, I have begun an informal examination of some of my paradigms and mental models as they apply to my trading and stock selection. In short, what Stockbee details is that stocks that have monstrous high volume moves tend to continue to have similar moves over time. These are the types of stocks I want to be in.

However, over the past year I have become extremely wary of trying to jump on stocks that have had huge moves for fear of catching the correction rather than the next leg up. I need to explore why my mental models are making me avoid these stocks. I feel I need to more actively screen for these high volume movers, and develop a system for finding a low risk entry. When the data shows that these types of stocks continue to have huge moves, it is stupid to not get involved at some point. Using TA for an entry, coupled with the edge this particular anomaly can provide might just be the jumpstart my portfolio needs.

One example of a stock having had a high-volume, explosive event is PNTR. I think this chart shows the potential to combine 3 elements to get an edge.


1. PNTR had a high-volume, explosive move. The edge here is knowing that these moves tend to occur again.

2. PNTR is providing a low-risk entry in that the trend has changed from correction and retracement of the huge move to higher highs, and higher lows (accumulation). Buying at the bottom of the current channel and placing a stop just below the channel should provide a good entry before the next move up.

3. Momentum, momentum, momentum. The edge provided by the anomaly of momentum cannot be overstated. I feel strongly that the highs of the explosive move will act as a momentum magnet, effectively pulling the prices back towards previous highs.

Finally, I would appreciate hearing from anyone out there who has run some backtesting or tracked long-term performance on stocks after they have an explosive, high-volume move. My apologies to Pradeep Bonde if I have at all misunderstood or misrepresented his data.

1 comment:

Muddy said...

"When the data shows that these types of stocks continue to have huge moves, it is stupid to not get involved at some point. Using TA for an entry, coupled with the edge this particular anomaly can provide might just be the jumpstart my portfolio needs."

You've found what I believe to be one of the greatest trading methods ever.
I've been trading for a ton of years and it's my favorite method of trading.

I scan for stocks and keep lists of every stock that made a 8%+ move on heavy volume increase everyday.
Low float,excellent dayrangers,like PNTR can give great shorter term profits when caught right,keep playing them over and over on certain chart patterns and dips and they can become a "cash cow".

If you've not visited read about my squeeze/volume/break method aka as sq/vol/br.There are other such momo methods described here:

http://greenonthescreen.blogspot.com/