Bounce Play Education

How to Trade the Bounce Play

The technical stock bounce play is the main focus of this blog.  It is a high probability setup where a stock makes a relatively high volume upward or downward move, and then an exhaustion candle forms, signaling a possible reversal.  The high volume initially signifies strength in the direction the stock is moving, but when the exhaustion candle forms, the high volume represents the bulls starting to buy (if the initial move was downward).  On the candle after the exhaustion candle, if the price moves above the high of the exhaustion candle, this is a buy signal.  One thing to be careful of is if the price opens the next candle by gapping up.  If the price jumps, especially over 0.5%, the trade is not as high a probability trade, because a portion of the targets profit has already been taken away by the gap up.  Also, gaps often like to close, which means there is pressure for the stock to move in the opposite direction we would hope for.

At this point, I watch the price very closely, because no amount of technical analysis can guarantee stock movement, no matter how good a setup looks.  If the price moves upward, I only take what is given to me initially.  As soon as the momentum runs out, I sell.  It is more important to hit consistent singles than to hit home runs every time in trading.  You will hit the occasional home run with this setup, and you will miss some with this strategy, but it is more important to protect your capital than to go for the big gain every time.  Also, keep tight stops with this setup.  If the stock starts going against you, it can move very quickly because there is momentum in that direction anyway.

Here is a chart that is the perfect setup. The stock fell about 13% on high volume.  This shows the bears were in control at that point and buying anywhere in there really would be trying to catch a falling knife.  An exhaustion candle forms(highlighted in yellow), still with high volume, which shows the bulls are starting to fight back.  When price moved above the high of this candle, that would be the buy signal, signaling the bulls are starting to take control.  It would have been a good buy for this stock at this price, as the stock continued to move upward for about a 10% bounce.  I would have sold where the candle highlighted in magenta is, as the momentum does appear to be running out there.  However, if you had to fortitude to hold through that, you could have taken advantage of the rest of the bounce.

Good examples of how to trade the bounce play
Daily Bouncer - YRCW
Intraday Bouncer - CROX
Intraday Bouncer - NVGN
Intraday Bouncer - MTOR

Daily Bouncer - HEAT