Bump and Run Reversal Pattern

 

If you are contemplating purchasing stock in a company, what if you had the means to predict the purchase price of that stock market patterns would be less tomorrow… It’s almost like a superpower. But how does one predict a stock price will fall? That’s the power of the bump and run reversal pattern.

The bump and run reversal pattern appears after a fast and large price hike due to excessive speculation. The pattern starts with a lead-in phase in which the prices advance normally without any signs of excessive speculation. triple top pattern The trend line during the lead-in phase is moderately steep.

The second phase of the pattern is the bump phase, in which prices increase rapidly compared to the first phase. During this phase, the trend line becomes at least 50% steeper compared to the lead-in trendline. option premium Traders should validate the bump pattern by checking the max—height of the bump in relation to the lead-in trendline. The distance from the highest point of the bump to the lead-in trendline should be two times (or more) the distance from the highest high in the lead-in phase to the lead-in line.

After prices reached their peak and start to decline towards the trend line, the chart begins to show the right side of the bump. Volume expands after the advance forms on the left side of the bump. american vs european options The run phase starts when prices reach the lead-in trendline. 

After passing the trendline, sometimes the price also retracts to the trendline, which is now also the resistance level. risk reversal option The bump and run reversal pattern can be used for all types of trading, from daily, to weekly, to monthly, with the understanding that the movement is unsustainable for a longer period.

How Does the Bump and Run Reversal Happen

The setup works like this; the momentum continues on the stock creating an upward slope, it signals to investors that they should acquire the stock, as the days proceed, investors continue to bid up the stock and the price rises. Then there is an event that happens, such as earnings, which causes traders to jump on the bandwagon and bid to stock up even more. iron condor option strategy As momentum increases, the price spikes to form a new higher sloping trendline. However, that is when things start to go wrong.

Here supply catches up with demand, traders start the realizes the stock has been bid up too much, and sellers come in and push the stock down. Volume during the lead-in phase is often elevated at the start, and then volume drops off until the beginning of the bump, which then suddenly spikes.


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