Avoiding Extended Stocks

PYX

One of the crucial fundamentals of swing trading is avoiding extended stocks.  But what qualifies as extended and how can one quantify that?  In some cases it is transparent.  PYX is one such example which is up over 100% within a 30 day frame.  When things aren't so clear what is an extended stock may be answered with, it depends.

Frequently attempting to quantify relationships in trading is a chicken/egg scenario that may end up quaking like a duck.  Attempting to find a hard and fast rule to define extended stocks may lead to a dogmatic assessment of the information provided by a stocks price action.  As with many trading questions, it is better to look inward than outward for solutions to this problem.

Suppose one’s metrics show an average holding period of 5 days and an average position gain of 8% over that time horizon.  Within these parameters a stock up 10% over the past 5 days already exceeds one’s avg. gain over holding period.  Under differing parameters this may not be extended at all, but within the prism of one’s actual results this may qualify.  Taking this trade would be under the expectation that price appreciates 20% within a 10 day time period.    At the time of this writhing there are 107 stocks above $5 with daily volume of 100K that are up 20% over 10 days.  Not only would the hypothetical trade exceed what one’s metrics show, under current market conditions it may also be a low probability.

Knowing this, scanning for stocks that have not had a significant move over one's average holding period will lead to stocks that are not extended.

CHRS

Another technique is to remove price entirely and look for flattening price zones using a MA that makes sense for one's holding period.

CHRS 10-Period MA

Metrics based analysis helps take the guess workout of what is or is not extended.  Using one's data and stats as the floor from which to build one's trading foundation will lead to actionable information.  Coupled with analysis of how the market is structured and behaves will help build out the frame.