this week's lesson.
The first point I want to make is that there are 5-10, maybe 20 tickers in 2020 that all formed similar patterns.
This pattern has existed in penny stocks and microcaps for a long time, but only happens 20-30 times a year. This is a viable strategy for a part-time trader. Let’s look at an example. For the first example let’s look at $BNGO. This is different than other examples and I will show you why.
There are two types of setups that are similar and can be easily confused, let me show you why they are different.
If you look at the long-term chart of $BNGO we can see the price ranges from 50 cents to $7.00. The total gain from the low to high, is over 1000%. We want to see the total gain percentage over 1000% and the individual stock price over $3. If the stock is under $3 it is not going to produce the results you want. In this case, $BNGO is over $3 and it up over 1000%. For this specific strategy we want the market cap to be below $2 Billion. The second criteria we’ll look into is the total dollar amount traded into consolidation. $BNGO consolidated around $5.70 to $7.00 (1/4/21). On that specific day it traded close to 600 million shares in volume. 600 million multiplied by $6-7 in total dollars traded is roughly $3-4 Billion, which is a lot of resistance.
To be able to use this as a swing trade, you will have to short under the consolidation area (within 10-15% of the consolidation). Normally a consolidation is wide which allows for a range between the low and the high. The high of the consolidation is $6.70 and the low of the consolidation is $5.90. To find a good entry after the market open we would be seeking a short between $5.80 to $6.50 and risk the high of the consolidation, $7.00. I try to manage my positions by using correct risk management. I went short 30% of my total size around $5.50-$5.60, right below the consolidation. If it tests the high of the consolidation then I would average my position when the price hit $6.50, making my average for the entire position between $6.10-$6.30.
In this trade, my average is $6.20 and my risk is up to $7.00. I am risking 80 cents out of a $7.00 stock, which is not that bad.
$BNGO traded 500 million shares a day so there is enough liquidity for you to be in and out without effecting the stock price.
The risk-reward we can take here, is between 50-75% in terms of how long we want to hold. For $BNGO if we take the entire range and cut it in half, we can gauge what the maximum reward would be. In this case, we are looking between $3.50-$3.70. We also want to be cognizant of major support levels below. In this case we see major support between $2.00-$3.00. Here we would be taking a short at $5.80 with 30% of size because we were in the middle of the consolidation range. If you begin covering around $3.50 to $3.00 you will be able to make 50% from your original position. This pattern will happen again and again. The three criteria for this pattern are:
don’t touch it
As a swing trader you want to look for the perfect criteria to hold for multiple days. This isn’t for intra-day action. We want the stock to follow the criteria and follow the rules. In terms of risk management, make sure your risk is within 15%. If your risk exceeds 15% make sure your sizing is small because if you’re risking more than 15%, it is not worth taking the trade.