3/16/2021
Follow the Bouncing Stock: How to Forecast Intraday Highs and Lows - TheStreet
PERSONAL
FINANCE
Follow the Bouncing Stock: How to Forecast Intraday
Highs and Lows
KEN WOLFF · MAR 13, 2000 2:10 PM EST
The law of narrowing oscillations isn't foolproof, but it's a good percentage play.
In the fourth grade, I wanted to grow up to be a magician. I was mesmerized watching the skillful
masters creating incredible illusions. I spent countless hours analyzing their best tricks. Once I
gured them out, they lost their mystique, but I felt I had gained powerful knowledge. Remember, I
was only 9.
According to some traders, I've achieved my dream -- they call my successful daytrading techniques
pure magic. Some even call it smoke and mirrors -- better than a Siegfried & Roy show in Vegas. But
I don't have a white tiger or a handsome young assistant. Behind every trick is a strategic approach
anyone can learn. And although I hate to demystify the world of daytrading for you, I'm happy to
share my secrets.
Today I'm going to reveal how I determine the upside and downside potential of a stock, or in plain
words, how much I think a stock will bounce or drop on an intraday oscillation.
I discovered this technique early on in my trading career after learning the "law of narrowing
oscillations." If you recall from my
Jan. 31 column, a stock generally makes its largest movements within the rst two hours, between
9:30 a.m. and 11:30 a.m. ET. This is when the momentum, volatility and volume are
normally
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Follow the Bouncing Stock: How to Forecast Intraday Highs and Lows - TheStreet
the greatest. As a result, this is where a stock shows the widest intraday swings.
Not always, but a good percentage of the time, the swing from the rst high to the rst low is the
largest oscillation a stock will show for the day and the oscillations will only get smaller as the day
progresses. This means the next swing in the oscillation will normally not be as high as the last
oscillation, just a bit smaller, like a bouncing ball.
Once I understood this concept, I was able to learn how to calculate the upside/downside potential
of a stock's intraday oscillation. If you do not gure out or have some idea how much a stock will
bounce, you have
no
reason to be in a trade, nor do you have
any
reason to believe that another high will occur. If you are, you are trading blind. Why jump on a stock
that a good percentage of the time will only bounce 1/8 or 1/4 of a point, when you can wait for one
that a good percentage of the time bounces 3/4 to 1 point?
There are actually a lot of moving parts to this concept, which I call market dynamics (a future
series of articles) but the simple explanation is:
When a stock is coming down from the high of the last oscillation, the upside potential is the last
high, actually a bit less if you remember the law of narrowing oscillations.
Take a look at the chart for
Macromedia
(MACR)
, a maker of Web-design software. It is a very old chart, but I keep it because it is a classic narrowing
oscillation pattern that illustrates my point. Notice how the swings get narrower and narrower.
Macromedia gapped down on earnings news and entered this narrowing oscillation pattern.
a
a-10
Thea-9,75
stock opened at point (a) and dropped to point (b). Using my method, the upside potential at
point (b) is a little over 10 points -- actually, a little less due to the narrowing oscillation rule. Note
that the stock did not climb up as high as point (a) but a bit less to almost 10.
If I were asked by one of my traders what the downside potential is from point (c), I would reply
"downside potential is 9 1/8 or a bit less." Notice the actual drop was 9 1/4. As the day gets long,
you must remember that the oscillations decrease even more, so you must decrease even more
from the last high or low. Notice that the climb from point (d) was only 9 5/8, much less than the
upside potential of point (c). Again, this is due to the law of narrowing oscillations and being later in
the day. The oscillations are more predictable early on in the day.
When I am playing an intraday oscillation, I will not play it unless I have calculated that there is at
least 3/4 to 1 point of upside/downside potential built into the stock. If I see a stock dumping like
Macromedia and I can clearly identify the bottom at point (b), I play the stock because it has more
than 3/4 of a point of upside potential built into it. Anything less is not worth my time and decreases
my winning percentages. I would enter the trade at the rst bottom and exit at the rst sign of
weakness, regardless of whether it reached my calculated upside potential or not. It is meant to be
a rough calculation of what is possible, not what
will
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happen.
保证在大的概率
中有收益，而不
是去强迫自己去
预测准确的值，
因为这样作是
不现实的。
有个例会不符合
这个总体规律，
但从长期的时间
来看，是准确的。
As I said, there are a lot of moving parts to this theory, and patterns certainly do not act exactly like
this all the time, but they do a good percentage of the time. Remember, I am playing the
percentages. If I can determine what a stock will do a good percentage of the time, then I have just
given myself an edge against other traders and increased my winning percentages.
Sometimes the oscillations slant up, sometimes down, sometimes they explode and blow this
theory to bits, but over time it's consistent. This is a very simpli ed explanation of this method, and
there are many other items to consider, such as overall market conditions and strength, sector
strength, daytraders' interest and strength, and strength of the story driving the momentum. I'll
explore and discuss these items in future columns when I start the Market Dynamics series.
Now that you know my secret, it may have lost some of its magical luster, but I assure you that if
you're able to master this method of calculating the upside and downside potential, you won't be
sorry. If you do, don't tell anyone, because you'll lose your "magician" status like I just did. But wait,
I'm not walking off stage yet. There's more to discover.
Come back to my Las Vegas daytrading magic show next week when I reveal how I play gainers.
Ken Wolff is founder and chief executive of cer of Paradise, Calif.-based
MTrader.com, an interactive educational daytrading and swingtrading Web site that teaches traders
how to create their own disciplined, high percentage trading programs. While Wolff cannot provide
investment advice or recommendations here, he invites your feedback at
ken@mtrader.com.
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