TECH TALK

Dr. Adrian Manz

The Fast Ball Expansion of Range and Volume Setup

By Dr. Adrian Manz, TraderInsight.com


Big market moves spell big opportunity for traders.  The best trading setups that I have found over the past twenty years come when the expansion-of-range-and-volume (XRV) pattern that I call Fast Ball propels a stock rapidly higher or lower.  Fast Ball XRV moves occur when institutions have directed their traders to buy or liquidate large equity positions.  The stock in trade overwhelms supply or demand, pushing price in a rapid directional move higher (in the case of buying), or lower (in the case of selling).  The resulting chart pattern is easy to spot and provides traders the opportunity to capitalize on institutional activity, which tends to continue over the course of several trading sessions.

Identifying Fast Ball Expansion-of-Range-and-Volume (XRV) Setups

The ability to zero in on institutional activity has made the Fast Ball XRV the cornerstone of my trading business for 20 years.  It is easy to find on daily price charts and intraday price support and resistance zones make risk control very intuitive.  Stop losses are placed outside of clearly-identifiable setup-day 5-minute intraday support or resistance.  The targets are also easy to spot, and are most frequently placed at daily resistance (for long trades), or support (for shorts).  There are two types of Fast Ball XRV chart pattern and the Type 1 setup is discussed first.

Fast Ball XRV Pattern Type One

The first Fast Ball XRV chart pattern occurs when a trending move pulls back, then breaks out in the direction of the trend.

The rules for a long entry are as follows:

  1. A stock is trending higher and pulls back.
  2. A breakout of the pullback occurs on the widest range of the past ten sessions, preferably on heavy volume.
  3. The buy entry is the following session, $0.10 above the XRV bar in the direction of the breakout.
  4. Close out at the end of day, or at the overhead daily resistance target, or on a trigger of a protective stop.

The rules for a short sale are as follows:

  1. A stock that is trending lower pulls back.
  2. A breakout of the pullback occurs on the widest range of the past ten sessions, preferably on heavy volume.
  3. The short-sale entry is the following session, $0.10 below the XRV bar in the direction of the breakout.
  4. Close out at the end of day, or at the underlying daily support target, or on a trigger of a protective stop.

An example of a short-sale setup is provided in a recent move in Welltower Inc (HCN), in Figure 1.

Based on the price movement in Figure 1, the parameters of the trading plan for HCN for July 7, 2017 were as follows:

  1. A pullback and breakout occurred on the widest range of the past ten sessions, on heavy volume.
  2. The short sale is 0.10 below the low of the XRV bar (short at $792)
  3. The stop loss price is 0.05 above 5-minute intraday overhead resistance (stop out at $724).
  4. The profit target is at the daily support inflection (buy-to-cover at $72.41)
  5. Once the trade is initiated, money-management rules take over, and the position practically manages itself.

There are three hurdles that HCN must achieve to exit without a loss.  The first is that HCN must trade lower to within 50% of the distance from the entry to the profit target.  At that point, the stop loss is moved to breakeven.  The second is that HCN must trade to within 0.10 of the profit target.  At this point, the stop is moved down to the 50% to target level.  The final hurdle is the profit target.  When HCN hits the target, all shares may be closed, or a portion may be closed, with a trailing stop placed on the balance to protect the open profit.  For accounting purposes, we record all shares as being closed at the target when it is reached.  We will exit the trade immediately if the stop loss is hit.

As represented in Figure 2, the intraday trade in HCN hit the 50%-to-target level within minutes of the trade being initiated, moving the stop to breakeven.  When 0.10-to target was achieved, the stop was moved to $72.67, which is 50% of the move to the profit target.  This locked in a profit and created a risk-free position.  When the target was hit at $72.41, the position was closed.  The profit was 0.51 per share traded.


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XRV Pattern Type Two

The second Fast Ball XRV chart pattern is also easy to spot, and occurs when a trending move pauses and forms a consolidation range.  This time, we are looking for a trend or counter-trend breakout of the consolidation range.

The rules for a type 2 long entry are as follows:

  1. A stock that is trending higher consolidates for several days.
  2. A breakout of the consolidation occurs on the widest range of the previous ten sessions, preferably on heavy volume.
  3. The buy entry is the following session, $0.10 above the extreme of the XRV bar in the direction of the breakout.
  4. Close out at the end of day, or at the overhead daily resistance target, or on a trigger of a protective stop.

The rules for a short sale are as follows:

  1. A stock that is trending lower consolidates for several days.
  2. A breakout of the trend pullback occurs on the widest range of the previous ten sessions, preferably on heavy volume.
  3. The short-sale entry is the following session, $0.10 below the extreme of the XRV bar in the direction of the breakout.
  4. Close out at the end of day or at the underlying daily support, or on a trigger of a protective stop.

Figure 3 provides an example.  The components for a potential long entry in VF Corp (VFC) were in place.  The parameters for the upcoming session were:

  1. The entry is 0.10 above the high of the Fast Ball XRV bar (buy at $55.46)
  2. The stop loss is 0.05 below 5-minute intraday support from the trading that occurred in the Fast Ball XRV setup day (stop out for a loss at $55.06)
  3. The profit target is at the inflection at daily resistance (sell for a profit at $56.25)

Figure 4 shows the intraday 5-minute chart and the progression of the VFC trade once it triggered.  Note that Fast Ball XRV trades are frequently accompanied by rapid intraday moves, as buying or selling pressure reassert during trading.  This is particularly true during the first few minutes of the session and is caused by the flood of directionally biased orders that were staged prior to the market open.  These orders can result in extreme volatility because they are frequently placed as market-on-open orders.  They exhaust liquidity and push price rapidly in the direction of the Fat Ball XRV daily momentum.  Once these orders have been filled, price frequently reverts toward the prior session’s close to provide both shorter and longer time frame opportunities for profit.

Success of the “Textbook” Pattern

Held to the strictest interpretation of these guidelines the Fast Ball XRV has generated significant results in a $100,000 non-compounded trading account each year since 2006.  Trading a fixed lot size of 1,000 shares, the Fast Ball XRV generated an average annual return of $20,390 or 20.39 per cent.  Accounting for the fact that a $100,000 account could generally leverage more than 1,000 shares per trade, this return could easily be increased substantially by assuming additional risk on each position.

The most significant characteristic of the Fast Ball XRV is the stability of the pattern over time, and the fact that it tends to outperform on the short side of the market.  Short sales produce more profitability even when the broader markets are making large positive swing moves as they did in 2013, 2014, 2016 and 2017.  These returns are not curve fit or back tested, but rather are the results for the Fast Ball XRV triggers as they were planned and published in my trading plan at traderinsight.com since 2006.  Each trade is rule-based and handled by strict money management criteria to maximize replicability.  A copy of the rules and every Fast Ball XRV setup since 2006 is available at www.TraderInsight.com.

Layering in Multiple Entry Points to Increase Profit Potential

The textbook version of the Fast Ball XRV generates great results.  But there is always room for additional opportunity and in recent years I have used alternate entry levels based on multiple-session support, resistance, Fibonacci retracements, and floor trader pivots to generate additional opportunities for profit.  Figure 5 shows a trading plan in Southwest Airlines (LUV) that never triggered by its original trading parameters, but booked a profit on the session with alternate entry parameters.

As you can see in figure 6, the support and resistance alternate-entry data presented in my trading plan in Figure 5 show an inflection confluence entry at 62.31.  When this entry triggered, the initial target at prior-session-support (61.92) created a profit of 0.39 per share traded in LUV. 

The secondary trades are simple support and resistance alternate entries.  Their ability to generate significant profits has, however, been substantial.  Students of my work become believers when they take the time to refine their plans and develop multiple entry levels for the Fast Ball XRV.

Putting the Pieces Together

The Fast Ball XRV is one of my favorite trading setups.  It has served up trading opportunities in all types of markets over the past 20 years, and the options for alternate entries are plentiful because of the range and volatility on the setup day.  Though I scan over 1,400 stocks by hand each night to identify the XRV and my other patterns, several scanners are available and have been customized so my students can identify and narrow the next day’s possibilities with ease. These students are then trained how to setup the XRV trades, allowing them the autonomy and self-direction they seek in their trading.

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ABOUT THE AUTHOR

Dr. Adrian Manz

Author: Adrian Manz, Founder & Lead Day Trader
Company: Trader Insight
Website: TraderInsight.com
Services Offered: Trading Rooms, Trading Courses, Special Events
Markets Covered: Stocks, Options, Futures

Dr. Adrian Manz is one of the most sought-after market educators, and is a popular speaker at international conferences, in the print media, and on radio and television.