Would You Trade This Stock?

Let’s talk about volatility and intraday range.  Generally, it’s best to select swing or day trading candidates that have stable patterns, clean ranges, respect for support and resistance (and moving averages), stability, and the like.  What happens when you look back on a stock’s chart and see wildness and confusion?  It might be best not to trade it.

Let’s look at Charles Schwab Corp (SCHW) for an example of a potentially great company with an erratic stock price pattern.  The daily chart is shown below:

SCHW daily" src="http://blog.afraidtotrade.com/wp-content/uploads/082508-1822-dow212.png" alt="" width="489" height="314" />

Let me reinterate that I’m not discussing the fundamentals or the company itself negatively - I’m only referring to the seemingly random or erratic patterns the stock makes as to a potential reason to shy away from erratic charts and gravitate towards more stable charts.

Focus on the size of the wicks of the candles, or the intraday highs and lows that are sometimes greatly different than the opens and closes.  Also, notice large volatility moves (large daily ranges) that are quickly retraced the next day, and also notice the extreme “chop” or daily price-bar overlap.  There’s so much up and down that it could make you dizzy!

There are very few up days that follow up days.  Rather, (which is characteristic of the current market environment), down days follow up days and vice versa until we have a relatively trendless, confusing market without clear price patterns - or if you can find price patterns, price runs through them intraday before reversing.

Let’s pull back the timeframe to see if the weekly chart confirms this ‘choppy’ pattern.

SCHW weekly" src="http://blog.afraidtotrade.com/wp-content/uploads/082508-1822-dow221.png" alt="" width="485" height="313" />

While the price action gains additional clarity the further you pull back the timeframe, we still see long wicks (intra-week ranges) and erratic behavior.  Interestingly enough, the dramatically choppy period on the daily chart from July to August actually was almost five ‘up’ weekly closes on this scale (all of which supported intra-week on the rising 20 week EMA).

Summary and Thoughts:

When you’re scanning for stocks and find perhaps a condition that would trigger a second look or perhaps a buy (or sell), it’s important not to take the signal blindly, or on its own merits, but to look at the recent behavior of price to see if you can find relative stability in swings or intraday ranges - and if not, look elsewhere.  Many other stocks are likely showing cleaner, more understandable patterns.

What if you just can’t resist trading such a volatile stock?

You’ll absolutely need to raise your stop (decrease if long or increase if short), which often leads to a smaller position size.  You absolutely need to take the volatility conditions into account when planning these decisions anyway.

If you view a moving average as support, you’ll need to place your stop-loss further beneath that average than you normally would if you can see the stock has a history of breaching these levels and then reversing.

There’s literally thousands of stocks to trade - why trade something that shows erratic behavior consistently?  While this won’t guarantee success, it could decrease frustration and lead to potentially easier trading decisions.