Trading the Expansion Bar Signal

Intraday trading ranges naturally expand and contract over time while market players battle for directional control or when a trending security attracts a stream of buyers or sellers. From time to time, a single day's price bar closing near the intraday high or low carries a wealth of information that observant traders can use to make profitable buy and sell decisions. (See also: The Importance of Managing Risk in Momentum Markets.)

These wide range bars, which print greater-than-average ranges at key market intersections, may confirm major price developments, such as a successful or failed test at a moving average. At other times, they can signal a sharp increase in momentum, with one side giving in and allowing a trending security to surge higher or lower quickly because the friction of opposing positions has been removed from the system. (See also: Range Bar Charts: A Different View of the Markets.)

Moreover, legitimate breakouts and breakdowns should elicit at least one major wide range bar because the security is pushing beyond an easily observed boundary, like a trendline or horizontal resistance level. In turn, this should encourage a large number of market participants to come off the sidelines in an emotional act that yields greater-than-average volume. (See also: 3 Reasons Not to Trade Range Breakouts.)

Conversely, the failure to print a high-volume wide range bar during a breakout or breakdown generates a notable divergence that tells us to watch for a reversal that traps the trend-following crowd. While it isn't necessary for the bar to print on the day of the breakout or breakdown, it should appear within the broader set of price bars that form the rally or sell-off wave. (See also: How to Trade and Profit From Pattern Failures.)

[If you'd like to learn more about interpreting charts to derive profitable buy and sell signals, a great place to start is the Technical Analysis course on the Investopedia Academy, which includes videos and interactive content to help you improve your trading skills.]

Price movement into the 50- or 200-day exponential moving average (EMA) creates special conditions for wide range bar signals that traders can use for timely entry or exit, depending on the outcome. But patience is required because the testing process can unfold over many weeks, during which price bars congest while bulls and bears fight for domination. This conflict can draw multiple signals, with bars expanding away from the moving average on higher-than-normal volume and then reversing gears into another test. (See also: Moving Averages.)

Each expansion bar adds to an underlying theme that eventually yields either a sustained reversal that continues the trend in place prior to the test or a sustained continuation move that breaks the moving average. The complexity of this testing process and its multiple incarnations can fool less-prepared traders who jump on each wide range bar and then get whipsawed in the opposite direction.

You can improve timing with expansion bar signals by looking for a volume surge that shows high emotional levels. In addition, a 5,3,3 Stochastic indicator improves results after extended tests, with the observant trader watching for the final thrust to coincide with a bullish crossover for a rally and bearish crossover for a decline, preferably aligning with overbought and oversold levels. (See also: Stochastics: An Accurate Buy and Sell Indicator.)

It’s easy to see how expansion bar signals could have benefited your bottom line when real estate giant CBRE Group ground through three tests at the 50-day EMA in a four-month period:

1. In December, it bounced at the moving average after an extended test, posting the widest range bar in two weeks on increasing volume while Stochastics printed a bullish crossover at the oversold level.
2. In February, it completed a successful 12-day test by gapping above the moving average on the highest volume in eight sessions and posting the widest intraday range in three weeks, while Stochastics again printed a bullish crossover at the oversold level.
3. In March, it ended a six-week consolidation on top of the moving average with the widest range bar of 2015 while Stochastics jumped into the overbought level in a "Stochastics Pop" buy signal, popularized by Jake Bernstein in his 1995 book "The Compleat Day Trader."

Wide range price bars often generate important signals that traders can use for timely entry or exit. (For additional reading, check out: Using Technical Indicators to Develop Trading Strategies.)