This concept looks to target market bottom reversals.
While not every FTD leads to a new bull market, there has never been a new uptrend without it.
When the S&P 500, Nasdaq 100, Russell 1000/3000 has a 'Follow Through Day' you want to consider entering into positions in the indices or specific stocks.
You do not need full positions, but this is where we can find the lowest risk for entry and potential for the greatest ROI.
When the S&P 500 index is trending, look for individual stocks that could experience bigger moves than the index. Remember, the S&P 500 has stocks that are going both up/down and the average of them is upwards; this may mean that top performing stocks are moving faster than the index.
Identify leaders and laggards.
Follow Through Day (Explanation of a Follow Through Day)
Identifying the First Rally Day - Green candle closes higher than previous red candle close. It should be a strong green candle and not a doji or spinning tops; exceptions for hammers (especially at support).
Identifying a Follow Through Day - Often 4-7 days later that has greater volume than the previous candle on average to above average daily volume
Typically green volume > red volume
Green candle closing > red candle close (Green candle closing above a red candle open is stronger)
Move should create a pivot or higher low to create a trend line; rally base rally can be effective, but not as strong
Look to enter on Follow Through Day or at market open the next day
How to Invalidate a Rally Before a Follow Through Day - breaking the low of the First Rally Day
How to Invalidate a Rally After a Follow Through Day - breaking the low of the Follow Through Day
Can Follow Through Days be Sooner?
Personally, any quick follow through days within the next 1-3 candles are typically met with a quick downfall
What goes up quickly, comes down quickly
Most moves are gradual
Consider a lower time frame (30 minutes to 4 hours) if you must play the initial break and exit quickly on a MA or trend line
Above: Covid Crash
The Covid Crash saw the Follow Through Day nine (9) days later
This rallied from $264.86 on 04/06/20 to an all time new high (ATH) of $479.98 on 01/04/22 an 81% move in less than two years
$406.12 on 04/06/21 (53% ROI in one year)
For those playing long, dollar cost averaging, investing in IRAs, or investing in targeted date mutual funds this strategy is highly effective in terms of ROI
Key Follow Through Day Statistics
Distribution on Days 1 or 2 after a FTD fail 95% of the time
Distribution on Day 3 after a FTD fail 70% of the time.
Distribution on Days 4 or 5 after a FTD fail 30% of the time.
*Distribution - Sell off of market. Distribution days is a term related to distribution stock in the sense that heavy institutional selling of shares is taking place. A distribution day, technically speaking, occurs when major market indexes fall 0.2% or more on volume that is higher than the previous trading day (price is falling, but volume is higher).
Above:
Red zone shows a failed rally (green 3 candle in zone) as it is invalidated with a lower low
Our next rally candle is the pseudo hammer (there is a top wick, but it looks like a hammer) as it closes above the previous red close
We wait nine (9) days before our Follow Through Day. Note the pivot, green candle closing above the red candle open, and higher volume than the previous (hard to see, but greater volume)
We can then create a trendline and close below it several weeks later or take profit early on huge volume boost over the 200MA
Above:
Red zone represents another failure with a lower low (initial candle is a gravestone doji; which is not a great candle for a rally)
First Rally Day on green candle with high wick
Five (5) days later we get our pivot, green candle closing above red candle open, and exponentially higher volume.
Exit after close below trend break
Above:
Red zone shows a failed rally (green 2 candle in zone) as it is invalidated with a lower low by the next candle
Rally candle created (circle)
Similar to other example we wait nine (9) days before our Follow Through Day. Note the pivot, green candle closing above the red candle open, and higher volume than the previous. Note that volume does not need to be higher than the average, just greater than the previous red day.
Ride trend until close below trend break
Above:
Red zone shows two failed failed rallies
Rally candle created (circle)
We wait five (5) days before our Follow Through Day. Note the pivot, green candle closing above the red candle open, and higher volume than the previous.
Ride trend until close below trend break.
Note how we created our trend line with two points that had a more horizontal, flatter, trend. We adjusted the trend after the next pivot to give us a tighter trend line. The pivot also offers us a point to add to our position.
Above: Failed Attempt
Not all Follow Through Days will be winners
We wait nine days for larger volume on a weak green candle (spinning top) that does not close above the red candle
The next day we gap up, but the trend is short lived and soon falls off
Unless we see a strong green candle closing above a red candle look to pass on the opportunity and find another time
Above: 3 Failed Attempts, 1 Successful FTD
First Red Box
Initial rally day (large green candle - 2, first candle was a spinning top which we do not use).
Soon after we see candles breaking the green candle low invalidating the rally.
Second Red Box
We see the initial rally day (first green candle)
There is a continued uptrend, but no volume bars that are greater than the initial candle or previous red volume day
We want to see a strong green candle and higher volume than a previous red days volume
Soon after the rally falters and creates a new low; barely, but invalidates the move
Third Red Box
We see the initial rally day (first green candle)
There is a continued uptrend with volume bars increasing, but we saw no red candles in between or opposing selling pressure
We soon see a large red candle followed by several other red candles invalidating the rally with a new low
Follow Through Day
We see our initial rally day (circle)
On the sixth day we see our FTD with a green candle closing above a red candle and higher volume than the red candle
In strong fashion, we have an engulfing candle (3 - the body of the previous candle is within the open and close of the newly formed candle signaling strength in the move)
Above: Failed Attempt
First Red Box
Initial rally day (large green candle - 2)
We go 16 days before we finally see a green candle with volume higher than the previous red candle volume
FTD's should be within two weeks (10 days) from my personal charting
Additionally, the move is a rally base rally (see rally base rally and potential strategy) and not a true pivot (creating a higher low)
Second Red Box
We see the initial rally day (first green candle)
There is a continued uptrend, but no red candle
Next candles create a new low invalidating the rally
Follow Through Day - not an optimal entry
We see our initial rally day (circle)
On the sixth day we see our FTD after a rally base rally
Remember, the 200MA (purple line can server as support and resistance, but often can act as a magnet when price action nears the MA. In this case, we see it steadily hit the 200MA before pulling back
Not the best entry, but consider the low of the red spinning top for exit
Can we have a rally without FTD?
Yes! You can absolutely have a run without a FTD and instead find some other type of pivot
However, bull market runs typically last months to years (2.7 years on average), so moves without a FTD may often be short lived; though they can still be profitable.
The idea is to be patient with your entries and tight with your stops
You may miss a run sometimes, but there will be another
Optimizing the Follow Through Day
Look for strong green candles on follow through day
FTD should have a green candle closing above a red candle
Green candle should be closing above the 8MA; even better when several candles have closed above the 8MA prior to the FTD
Only occurs at the bottom of a downtrend and not in the middle of an uptrend; do not use if a second pivot has already been established. While it can be used as a form of confirmation of a continuation in trend, it is primarily used for new uptrends.
Look for opportunities that offer at least a 3:1 ratio
see charts below
Consider your Trading Style (see Type of Investor - Coming Soon)
Are you a long term holder? Regardless of the ups and downs you are holding for retirement?
Short term holder? Trend line break and take profit
Core Trader? Hold onto X-amount of shares no matter what, but buy and sell new shares as smaller trends develop?
Knowing your strategy and sticking to it is the most important thing; especially if it is going against profits, but in a longer position play. Consider what is a month or two of holding if you are planning to hold until retirement.
The picture below shows us an entry, but we are capped by resistance and the 200MA (purple line) which is almost identical to our 200% or 1:1 ROI
While there is always potential to run, we still need to surpass the pivot at about the 150%; which we rejected and saw the trade ultimately fail
In contrast to the chart above, our entry gives us a 3:1 ratio that is slightly below the pivot
Though we are still below the 200MA, we have room to run back up and still collect
Note the strong move of candles that close above the 8MA before our entry
Also not the strong close above and area or resistance