In the dynamic world of stock trading, the quest for consistency and the ability to identify stocks with explosive potential are perpetual challenges. This guide, presented by Rick Pedicelli from MorpheusTrading, aims to unravel the intricacies of the 3/20 stock scan strategy. More than just a tool, this strategy is a gateway to mastering the art of trading, providing a systematic approach to navigating the complexities of the stock market.
Unveiling the 3/20 Stock Scan
Rick Pedicelli, a seasoned trader with over two decades of experience, introduces us to the 3/20 stock scan, a nightly ritual that serves as a beacon for traders seeking quality over quantity in their watchlists. The 3/20 scan, named for its criteria of a 3% price move with a 20% or greater increase in volume, is a simple yet remarkably effective strategy.
Understanding Stock Terms: A Foundation for Success
Before delving into the intricacies of the 3/20 strategy, it’s essential to clarify some fundamental stock terms to ensure traders of all levels can follow along seamlessly:
Liquidity
Liquidity refers to a stock’s ability to be bought or sold without causing a significant price change. Stocks with higher liquidity tend to have lower volatility.
Volume Analysis
An integral part of technical analysis, volume analysis involves studying trading volumes to gauge the strength of price movements. High volume often confirms the validity of a price trend.
Relative Strength
Relative strength indicates a stock’s performance compared to a market index or another stock. A high relative strength suggests that the stock is outperforming its peers.
Moving Averages
Moving averages are calculated averages of a stock’s price over a specific period. They help smooth out fluctuations and identify trends in the stock’s price movement.
Bull Flag
A bull flag is a bullish continuation pattern that signals a brief consolidation before the prevailing uptrend resumes. Recognizing bull flags is crucial for identifying potential breakout points.
Gap Up
A gap-up occurs when a stock’s price opens higher than its previous closing price, creating a gap on the chart. Gap-ups can indicate strong buying interest and potential upward momentum.
Shakeout
A shakeout is a sudden drop in a stock’s price, designed to remove weaker hands from the market. It often precedes a rally and helps establish a stronger support level.
Navigating the 3/20 Stock Scan: Step-by-Step Guide
Liquidity Filter
The liquidity filter, a foundational aspect of the 3/20 scan, includes criteria such as the close being greater than 15, average volume past 50 days greater than 375,000 shares, and the close being greater than 30% of the 52-week high.
Volume Filter
The volume filter involves a 50-day dollar volume calculation, providing insights into the daily dollar volume a stock achieves. This step is crucial for assessing the liquidity of a stock.
3/20 Component
Identifying stocks that have moved 3% with a volume 20% greater than average is the essence of the 3/20 component. This criteria act as a powerful filter to focus on stocks with significant price movements.
Additional Filters
To ensure a stock has made a decent advance compared to its daily range, the 14-day Average True Range (ATR) is employed. This adds an extra layer of confirmation to the potential strength of a stock.
Relative Strength Filter
The relative strength filter, set to 8% based on 252 days of data, provides insights into a stock’s strength relative to others in the market. It is an essential component for gauging a stock’s overall performance.
Practical Tips: Making the Most of the 3/20 Stock Scan
Rick Pedicelli shares invaluable insights into maximizing the effectiveness of the 3/20 stock scan, offering practical tips for traders looking to enhance their trading strategy:
Focus on Valid Basing Patterns
When using the 3/20 stock scan, focus on stocks that are forming valid basing patterns. Ideally, these patterns should be 15-35% deep, situated around the 50-day moving average, and above the 200-day moving average.
Embrace Gaps
Gap-ups are potent signals that can offer lucrative opportunities. Whether buying the move out or waiting for the first pullback to the eight-day Exponential Moving Average (EMA), gaps can be instrumental in identifying entry points.
Utilize Downtrend Line Breaks
Identifying stocks coming out of a downtrend line break or after undercutting a base low can lead to significant moves. These setups often present themselves as strong entry points.
Monitor Shakeouts
After a shakeout, stocks that hold up are poised for potentially more robust moves. Shakeouts serve to clear weak hands from the market, setting the stage for renewed buying interest.
Case Studies: Bringing the 3/20 Scan to Life
To illustrate the practical application of the 3/20 stock scan, let’s explore a few case studies:
SNOW
A 320 occurred on 1/22, signaling a potential entry. The subsequent pullback offered an opportunity to buy near the eight-day EMA.
SHOP
Another success story where the 320 paved the way for a subsequent pullback, providing an entry point around the 81 area.
APP
Despite an impending earnings report, a strong 320 signal on APP highlighted a potential buying opportunity after a tight range session.
PLTR
Featuring a massive gap, PLTR showcased how a buy over the prior day’s high can capitalize on the 320 momentum.
MDB
An example of a stock with a big volume move up, MDB’s breakout above the 440 level following a 320 made it an attractive pick.
The Go or No-Go Situation
Rick introduces the concept of a “go or no-go” situation. Once a stock breaks out with volume and aligns with the 320 criteria, it’s time to monitor closely. The 320 acts as an alert, and subsequent price action dictates the next move.
Closing Thoughts: Simplify and Succeed
In wrapping up this enlightening journey into the 3/20 stock scan, Rick Pedicelli emphasizes its simplicity and effectiveness. This powerful tool aligns stocks with strong price and volume actions, typically above the 50-day moving average and with prices above the eight and 20-day moving averages.
Give It a Try and Elevate Your Trading Game
Ready to embark on a journey of mastering explosive stock moves? The 3/20 stock scan awaits your exploration. Simple, adaptable, and potent, this tool can become a cornerstone in your trading arsenal. Give it a try, refine your approach, and witness the transformative impact on your trading success.
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