Wise Words

"Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched – if it gets pulled too far, eventually it will snap back. As a short-term trader, I try to wait until the rubber band is stretched to its extreme point."

- Linda Bradford Raschke

Taz Trader Blog

Written on 08-03-2010 5:29 pm by Craig

How to Find Explosive Stocks for Swing Trading

My best trades are always those stocks that are at the beginning of trend. They are stocks that have recently exploded our of a base, double bottom, trend line break, etc.Many times these stocks will just continue moving up. But, every now and then they will pull back giving me a nice opportunity at my favorite chart set up - the first pull back trade.

But how do you find these explosive stocks?

The best way to find these stocks is to scan for a wide range candle that closes near the top of the intra day range.

But, it depends on where this wide range candle is located on the chart to determine its significance. You have to be able to tell the difference between a wide range candle that ignites a new trend and one that ends a trend (exhaustion move).

Here is an example of s stock that starts a new trend:

new stock trend

This stock has exploded through the upper trend line. It has completely erased the previous down trend and has just begun a new up trend. So, this is a stock that I would add to my watch list and wait to see if it sets up a first pull back scenario.

Here is an example of a stock that is showing signs of an exhaustion move:

exhaustion move

This stock has a nice wide range candle (compared to previous candles) but it has happened after an already extended move to the upside. So, I would not trade this stock.

Now, let's look at how this would work in the real world. Take a look at the following chart:

explosive stocks

The black arrows are wide range candles that have started a new trend. See how they have exploded up through the down trend? So, these are stocks that you would add to your watch list. Then you would just look to buy the first pull back (green, circled).

At the top of the chart you will see a good example of an exhaustion move. This is a nice wide range candle but it has formed after an already extended move to the upside - not a good time to trade this stock!

So, to find these explosive stocks, all you have to do is create a scan that looks for wide range candles that close near the top of the intra day range. Then, you will have to sift through the scan results to find those stocks that are igniting a new trend.

It takes some time to find these stocks but it is time well spent!