Tight Ranges Can Only Expand

3 Jul 2018

 

 

What is a squeeze?

 

A squeeze is a price consolidation usually after an extended move. It takes the form of a base and the best will trade sideways in a tight range while the trend catches up with the price. If you look at a trend it will travel from the bottom left of your screen to the top right of your screen usually at a 45% angle. After price takes off and rallies for a few weeks it will usually take a few months or more of sideways trading to move back into that 45% trend area before breaking out on the next leg up. 


If your entering trades as they start to move out of a base you will have a tight defined stop area with plenty of headroom for price to get extended. 
 

 

The Here Comes The Story Zone


If you are entering after the price has started to extend the reward to risk is moving away from you. The later you leave it the more the odds of winning are skewed out of your favor from only needing to be right about 40% of the time to needing to be right over 50% of the time. I call it the "here comes the story zone" You will find all these shares pumped daily on social media. 
 
When we enter a trade and post it on social media the replies are always the same. Its too illiquid, I don't like the spread, its trading at a premium to NAV, it has a low stock rank, it has a high PE ratio blah blah blah… But as it starts to move up into extended area's the story takes hold. Remember the people who are caught up in the "story zone" are consistent losers. I know it sounds harsh but it is what it is and these are the people you will be selling your winners to. Everybody has the choice of entering trades from the tight reward to risk area where the math of winning is at its best but most choose to wait for their favorite journalist or trading guru who doesn't trade to give them the ok. usually just before the trend ends. 
 

 

Locating the Squeeze Area


You don't need a squeeze chart to find these area's but it does help to highlight them. The more charts you look at the more obvious the squeeze area's will become. One of the biggest mistakes I see is people zooming a daily chart in to see every tick. What you need to do is zoom your chart out so you can see at least 3 years worth of data or more. 
 

 

The Chart Squeeze Combined with the Moving Average Squeeze


If I'm entering a longer term trend following trade I will look for confirmation with the moving average squeeze. The sweet spot is where the price squeeze coincides with a moving average squeeze. You will also notice all trades were overbought on the entry trigger day. If price cannot reach overbought then price is not rising. Price moving above a previous overbought high is bullish. Not overbought.
 

 

When the Trend Ends.
 

It doesn't matter what the story is. how good the fundamentals are. Overextended is overextended and dreaming about the future growth won't change that. If you cannot take profit on your overextended trades as they start to show warning signs or breakdowns in price action you will underperform your true potential.
 
Selling is the hardest part of trading. The trend ended. The end. Delete from watch list and move on.
 
Its much better to rotate your money into the shares that are actually moving out of consolidation area's than having it tied up for an undisclosed period with no guarantee it will ever go up. This is my view for mid to long term trend following. Its not my way or the highway. I'm compounding an account using fixed fraction growth and there are always enough new ideas to take the place of broken trends. A long term investor may be able to sit through a dip like this with ease if they have position sized correctly to account for the 50% pullback that is always around the corner. That’s not for me as I'm taking bigger positions to compound the account at a faster rate.   
 

You will notice the oscillator reading well above overbought areas as all the best trades usually are.  

 


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