How to identify the A quality setup

There is a very specific range expansion pattern we are looking for when trading momentum burst.When you start running scans in the morning like 4% scan or $ breakout scan , you are throwing a wider net. It catches few good fish and lot of marginal or extended setup. The key is to be extremely clear about what you are looking for and not get excited by each and every breakout.If you see the Timeline from yesterday or last one week or from last one month you will see that there are various levels of skills in identifying the setup. There are veterans of the site who have been around for years and they know exactly what they are looking for and they pounce on good …

via stockbee:

There is a very specific range expansion pattern we are looking for when trading momentum burst.

When you start running scans in the morning like 4% scan or $ breakout scan , you are throwing a wider net. It catches few good fish and lot of marginal or extended setup. The key is to be extremely clear about what you are looking for and not get excited by each and every breakout.

If you see the Timeline from yesterday or last one week or from last one month you will see that there are various levels of skills in identifying the setup. There are veterans of the site who have been around for years and they know exactly what they are looking for and they pounce on good setup in an instant.

At the other end you have novices in trading the setup and they often select wrong stocks. They have not spent sufficient time developing skill to instantly identify the setup.

What are we looking for

We are looking for a momentum burst lasting 3 to 5 days and that is preceded by a 3 plus days of period where there was no momentum burst .

The example below shows an ideal setup we are looking for. world news

When a stock goes up a lot after breakout the optical illusion creates a picture that can be slightly distorted and you feel the stock traded extremely narrowly pre breakout. That is why I have shown below the exact same stock and set up on breakout day.

What you see on the breakout day is a 4% breakout on high volume. Preceding that breakout for 17 days the stock did not have a momentum bust . During the 17 days it did not also have 4% breakdown. In 17 days prior to breakout it ha series of narrow range days.

Essentially this stock was consolidating pre breakout. The breakout triggered a mini buying frenzy and stock went up for next two weeks. We are interested in setups like this. This is an ideal example of setup but in real life you find a slight variation of this basic setup idea.

Look for the quality of a setup

Do not get into the habit of buying marginal setups. Wait for a A quality setup to show up. Better quality setups allow us to put logical and tight stop and they work instantly.

Here is another example of a good setup and how it would look on breakout day.

Look carefully at this set up and read my guidelines for finding best setup. Does this setup meets them.

stock should have range expansion on breakout day

volume on breakout day should be higher

day before breakout should be narrow range day or negative day

pre breakout there should not be many 4% breakdowns

stock should have linearity in prior action

correction or consolidation should be orderly

volume during consolidation should be preferably orderly

stock should close near high on breakout day

If you internalise the guidelines you would instantly recognise good setup from marginal one. More importantly if you religiously do the daily setup exercise I post, in few weeks or months you should be able to identify these setups even if someone wakes you up in the middle of the night and asks you to identify good from bad from a list of 20.

How did the above stock look on breakout day

Does it meet all our requirements. It traded in narrow range pre breakout . It had low volatility pre breakout. It traded linearly in previous move and this was a very compact orderly correction. On breakout day volume was higher.

Anticipating a breakout

Once you get good at trading these kind of breakouts you can focus your energy on identifying these kind of setups pre breakout. That allows you to anticipate a breakout and either enter in anticipation or put an alert and enter as soon as price exceeds certain level.

Anticipation of breakout requires working from some kind of pre screened watchlist to narrow your focus. I assume you do not have time to go through 8000 stocks daily in Worden universe and find these.

There are many ways to narrow the universe so that you look at only say 50 or 200 stocks to anticipate a breakout. But that is a topic by itself.

Look for A quality setup

A good setup works like a charm. When we select marginal setup or settle for second or third best it results in frustration.

To identify these kind of setup you have to understand this is a skill which requires some minimum level of competency. You develop that by correctly identifying setups after setups. For that you need to study historical setups. The other option is to attend the Stockbee boot camp where we spend considerable time on these things so that by end of the two days you can instantly recognise these setups and how to trade them.

Don’t settle for marginal setups. Always look for the Victoria’s Secret model. If you can’t find her don’t settle for Hanes model.

For more info: How to identify the A quality setup

stockbee