The importance of relative volume and waiting for backside – WISH 22% gap as an example

Today’s action in WISH exemplifies 2 things which I’ll expand on below:

1. The importance of relative volume
2. The importance of waiting for the backside (for shorting)

WISH gapped up and opened 22% higher than the close on Thursday. On the left-hand chart below the effect is clear and the volume bar shows that the trading activity is completely different from the previous weeks. The 3-minute chart to the right shows the development from open to close.

Daily chart to the left | 3min intraday chart to the right

The importance of relative volume
Many if not most successful traders will advise trading (primarily) in stocks that have high relative volume (RVOL*) on the day. At a basic level, this indicates there is significant trading activity and price movement, which creates potential trading opportunities. But most importantly, when a stock has RVOL, there is something unusual going on that induces stronger feelings which in turn creates irrational moves. This can lead to a strong trend with breakout setups and/or a parabolic run that crashes hard.

The polar opposite of this is an instrument trading in a chop zone with low volatility, low liquidity, and no feelings involved -> random choppy moves rarely leading to setups with an edge. Importantly its absolutely possible to trade profitably in a stock that doesn’t have RVOL, but if you listen to interviews with great traders, they often talk about this being unnecessarily difficult.

The importance of waiting for the backside (for shorting)
High RVOL stocks can often go through a full cycle in a day – the same classic Wyckoff cycle as a stock can go through during a period of months or even years.

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The Wyckoff cycle

In my experience, the cleanest examples of the full cycle within a single day happen with smaller companies (small and micro-cap stocks). But large-cap stocks can indeed have long and strong uptrends ending in a clear top formation before reversing.

Opportunities in WISH on Friday
I missed some long trade opportunities on the front side and I was a bit late to enter short on the backside. But even so, there was still ample opportunity, and the idea for this short trade relates directly to the topics above. The backside was confirmed – a clear change of the overall trend – and I entered on a pop, similar to buying a dip in an uptrend.

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Chart annotations from TradingView

More trade examples
My trades these days are mostly small caps with high RVOL and especially gappers. I share some trades – not always winners – on Twitter here: www.twitter.com/Samundana

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*RVOL is a measure of a stock’s trading volume compared to its average volume over a certain period, x bars back. For day trading it often makes sense to compare with the last 10 or 20 days.