Trading rallies is a common strategy with swing traders. Sometimes these rallies occur on high volume and these often lead to quick profits over a few days. These volume driven rallies are most effective in uptrending stocks.
A trade example of a volume driven rally is shown below in Chart 1. for LivePerson, Inc. NASDAQ:LPSN.
Chart 1. Swing trade setup for LPSN
Chart by stockcharts.com
The chart for LPSN shows an uptrending stock (with the 50-day moving average sloping upwards). The stock started to rally on high volume and pulled back for a few days on reduced volume to form a Harami reversal candle pattern. This is also an inside day pattern.
If the stock trades above the high of the inside day then a position could be taken. The swing trader could use a stop buy order (a stop sell order used in reverse) with the trigger price set to just above the high of the inside day..
It’s also a good idea to determine the risk reward for the trade so that the swing trader can then determine whether the trade is worth taken.
To determine the likely profit, the trader can use the previous rally as a guide. The rally started at 26.20 (label A on the chart) and peaked at 35.10 (label B). The 8.90 gain is then added to the 31.00 low of the current pullback (label C) which gives a profit target of 39.90.
The initial stop can be placed below at the low of the inside day at 32.50 to allow some wiggle room.
If LPSN trades back down below the low of the inside day then the stock is not ready to rally and the position should be exited.
The entry price with a market buy stop order placed the next day would likely be filled at around 34.20.
The risk-reward can now be determined.
Likely Entry = 34.20 with Initial Stop = 32.50 and Potential Price Advance = 39.90
Potential Profit = 39.90 – 34.20 = 5.70
Risk taken = 34.20 – 32.50 = 1.70
Risk-Reward ratio = 5.70 / 1.70 = 3.4
The risk-reward is favorable at 3.4 as the swing trader stands to make more than three times the amount risked.
The swing trader should now consider how to mange the trade. Using the previous day’s low as a trialing stop is an effective stop method to use when the stock is expected to make a quick surge higher, such as with this trade due to the high volume.
The swing trade for LPSN is illustrated below in Chart 2.
Chart 2. Swing trade entry & exit – LPSN
Chart by stockcharts.com
The stock trades up and the trailing stop is place just below the low of each previous day’s low. The position is stopped out after only four days at a decent profit