Volume Top/Bottom

Explanation: 
A stock is moving substantially upwards or downwards over the course of several 5-minute candles. As it gets more and more extended, the buying pressure starts to taper off. As the momentum slows down, the buyers start to take profits resulting in some selling volume. As the trend starts to reverse, other traders come in and look to short the stock to take advantage of the reversal. The combination of buyers taking profits and shorts coming in creates a powerful reversal.

What to look for:  

  • A strong extension away from VWAP

  • Little to no consolidation patterns in the overall move up or down 

  • A least 3% away from VWAP

  • A doji candle with a decent size topping wick (for an upward trend) or bottoming wick (for a downward trend)

Timeframe(s): 5-minute or 10-minute

When to enter:

  • If you are late to the move (i.e. there have already been several green candles printed, wait for a pullback. Enter as the stock pulls back to a level of support or as the stock is making a new high after the pullback.

  • If you catch a catalyst early and the move is just starting, enter with small size and scale up after a low volume pullback or confirmation of the move. 

Profit Target: 
You can take profits at any interval you feel comfortable with but a stop loss is typically set fairly far away. This is because you are waiting for a wick to form, which by default puts your entry a decent amount away from the apex of the extension.  Most volume tops/bottoms retrace to VWAP. A good strategy that maintains a strong risk/reward ratio is to take profits at 30% and 50% and then let the final leg run to VWAP.

Stop Loss: 

  • Volume Top: Just above the high of the move (i.e. above the topping wick that forms).

  • Volume Bottom: Just below the low of the move (i.e. below the bottoming wick that forms).

Examples:

DIS - Gap up
DIS - Gap up
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OSTK - Gap Up
OSTK - Gap Up
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KSS - Gap Down
KSS - Gap Down
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INO - Gap Down
INO - Gap Down
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