11/4/2017 Blast off - Traderencyclopedia

Blast off
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From Traderencyclopedia
I always say that you could publish your trading rules on the newspaper and no one
would follow them.
The key is consistency and discipline.
(Richard Dennis, famous commodities trader)

Speaking about price fluctuations, the term blast off indicates an explosive,
skyrocketing movement which can either be directed upside or downside.

Since these movements occur in such a violent and sudden way it is very difficult for a
trader to catch the beginning of the new trend, it becomes crucial to find a way which
can help us in spotting the likely birth of an upcoming Blast Off.

In 2002, Larry Williams adopted the name of this particular setup to call an indicator
which allows the trader to pinpoint those situations that present a potential for explosive
movements.

BEGIN FORMULA

declare lower;
input limit = 20;
We have a Blast Off whenever a
def Val = AbsValue(close - open); rocket takes off from its launch
def Range = high - low; disposal. The movement is rapid,
plot sample = Val / Range * 100; violent, strong but if we are well
plot Trigger = limit; prepared it is not unexpected.

END FORMULA

The logic is simple: Larry Williams compares open and close values with high and low values and if the difference between
the daily open and the daily close is smaller than the 20% of the daily range (h-l), it is probable that the next day prices will
move widely.

In other words, if the absolute value of (open-close)/High-Low is less than 20%, we expect to see a Blast Off.

Once a Blast Off is spotted, questions change

A Blast Off often comes after a contraction in volatility together with the presence of important technical levels. The
following chart shows how Acotel Group performed a positive +17,95% on the 27th of January, 2012.

Surely every trader would prefer to buy before such a Blast Off occurs, and the formula built by Larry Williams can be
useful in this sense, helping us in identifying those potential situations where to conduct a more detailed analysis.

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However, once a Blast Off has been spotted, questions that a trader may ask himself change:

How do I act now that the stock has taken off?

Do I try to chase the movement risking to get caught by a retracement, or shall I consider it a missing trade?
If I choose to buy, where should I place my stop loss?
How should I manage the trade?

They all are legitimate questions and it is necessary to remind that these violent movements often generate robust trends that
it is worth to look for. In such cases the initial upward movement, even if violent and extended, is not much significant
compared to the trend that follows it. The following picture clearly shows this kind of movement, where a solid uptrend
follows an initial Blast Off:

How to manage a Blast Off

A skyrocketing price movement has to be managed with great attention. First of all, a stop loss order must be placed at a
level which takes into consideration the nature of these movements: a too tight stop is destined to be triggered as when
directionality appears, volatility comes as well.

There are some sensitive points where to place the stop loss. Of course, ratios between open, close, high and low can be
very different: a Marubozu line, for example, represents an ideal Blast Off setup opening on the lows and closing on the
highs without hesitation. However, the theoretical model for the stop loss placement is build on a classic long candle,
characterized by the presence of lower and upper shadows and an open value under the close value. Otherwise the strength
of the movement wouldnt be evident.

The stop loss order can be placed:

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On the close value;

At of the total range;
On the open value;
On the low value;
As a discretional percentage from the entry point.

It makes no sense to place a stop loss on the high value, even if it proves to hold on the following session, since it is almost a
certainty that it will be triggered.

Lets come back again to January the 27th, 2012 when Acotel Group performs an impressive +17,95%. The first stop loss
had to be placed on the open value of this session. This level is more than 17 percentage points far from our hypothetic entry
on the close value.

Of course it is an initial stop loss, quite unacceptable for the management of the whole trade. So we choose to tie the stop
loss to time, giving the trade two more sessions before revising our exit level in the trade doesn't evolve in our favor. This
revision is essential because the initial stop loss is too large. However, prices often undergo small retracements that should
last, in a good quality setup, from 2 to 3 sessions. This is why its reasonable to wait at least a couple of sessions before
moving up the stop, as in the Acotel example, at of the range of the setup candle.

The new stop reduces a lot our risk profile, but it is not enough yet. As an explosive price movement occurs, we have to wait
some more few sessions, from 2 to 5 after the Blast Off, before it keeps moving in its original direction. Then we can again
revise the stop loss, moving it to the close value of the setup candle. Now the hypothetic loss is reduced to the commissions
cost plus a few percentage points of unfavorable movement which we had previously taken into consideration. The stop loss
has always to be managed on the close of each session and not on the touch of a level.

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Finally we take into consideration the discretional stop. Its good to remember that the market doesnt care much about
where we do place a stop. Stop loss placement is all about our need, not the need of the trend, this is why it is not
recommended to place a too discretional stop loss. Its better to be methodical also in establishing how much to lose.

When prices break out of a Blast Off it is possible to manage the trade with a touch-stop while the effort of revising the stop
on the whole trade should be taken whenever a further burst of volatility occurs. But this time it wont be a matter of
limiting losses, it will be a matter of liquidating profits.

See also:
Technical analysis sequential index
Blast off
False signals
The perfect number
The contrary opinion
Random walk
Volatility

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