Spring and Upthrust Trading Strategy
In this article, I will discuss one volume trading strategy, the Spring and Upthrust Trading Strategy. Please read our previous article, Finding Entry Opportunity using Volume Spread Analysis, for a better understanding of this article. As part of this article, I will discuss the following pointers in detail.
1. What is Spring?
2. Logic Behind Spring
3. Some Elements for determining spring
Spring and trend
Spring and volume
Spring and follow-through
5. When should avoid trading spring
6. My trading setup using spring
Spring (Opposite Upthrust(UT))
- Price dips below support and rallies to close on or near its high and back above support, so there should be a clear minor or major support zone.
- Failure to follow through after breaking below support or recent swing low.
- All bullish pin bar is not spring, but all spring is a bullish pin bar.
Spring is an example of a “bear trap.” WHY? Because the price drop below support appears to signal the resumption of the downtrend. But In reality, the drop marks the end of the downtrend, thus “trapping” the late sellers or bears.
The depth of the price drive to new lows below the support and the relative level of volume on that penetration can judge the strength of the sellers.
A spring involves the penetration of a well-defined support level on low or moderate volume. Think if a stock is going to break the support, it must break with high volume. The spring action shows that the stock is trying to break down and failed. It is an important sign of strength.
Spring and Trend
During an uptrend
- They will work best in trending conditions. During an uptrend, when the bullish signal appears, we go long.
- A retracement to a prior resistance support area is a typically excellent trade.
- Fibonacci retracement level also worked well
During a downtrend
When a spring signal appears during a downtrend, we need a retest of that spring before we can go long.
- Be sure that prior trends are over
- Background: The background is extremely important. You should see strength in the background with stopping volume, a selling climax, or an end of a falling market.
- Then appears spring, and Spring is Tested
Spring and Volume
Low volume spring
Volume should be lower than the original anchor(where support first occurred ). The candle at support when the price retraced the first time to support the candle should have a lower volume than the anchor candle. The shallow price penetration and low volume indicate sellers are exhausted. springs should be bought immediately.
High volume spring
High volume indicates demand coming in. As we trade with the trend, springs should be bought immediately if we want to trade for trend reversal. High volume indicates the presence of sellers more likely to test immediately or after some rally. To justify buying on the spring test, two criteria must be met.
- First of all, the volume on the test must be lower than on the spring itself. If it is not, nothing is proven, and no buyer should be done.
- Secondly, the price should hold at a higher level on the test than on the spring, and It is especially positive if the price supports at or above the support level on the test.
If these two criteria are met, the stock can be bought on the test of the spring. Immediately after the test, the stock should begin a rally.
Spring and Follow-through
WHAT PRICE ACTION SHOULD HAPPEN AFTER SPRING? If a spring fails to rally away from the SUPPORT and the price hangs near the Spring low, Something is likely wrong.
WHEN SHOULD AVOID TRADING SPRING
Context or background move
In a Downtrend where supply is dominated. the swing down to Spring has supplied (price decreasing and volume increasing) compared to the demand swing. The odds of success are low.
Momentum should be lost when approaching support, and the spring indicates strength. This is a good context. If momentum increases when approaching support and the next is a spring, the context is not showing strength, and the spring should be seen in the suspect.
Last demand swing
Shortening of thrust. Thrust Refers to the distance between the current swing high and a previous swing high (in an uptrend) or swing low (in a downtrend). Increased thrust is a sign of potential trend strength. The shortening of Thrust is a sign of potential trend weakness. If the last swing high is characterized by diminishing demand(price increasing and volume decreasing ), the odds of success are lower.
My SPRING SETUP(opposite for upthrust)
Trend continuous setup
- WELL DEFINED SUPPORT
- The last swing low or resistance turned into support
- Fibonacci retracement level (50-61.8%)
- 5 minutes
- Both stock and index
Context or background
- Market in a defined uptrend
- Cleared support level
- Low volume when approaching support level
Set up condition
- Price retrace towards support on low-volume
- Spring at the confluence of support plus VWAP (strong signal) or spring at support
- Buy above the spring
- Or Test of spring
- Below the spring
- Next resistance
- Or any bearish reversal price action
Spring and Upthrust Trading Strategy Summary:
The Spring and Upthrust trading strategy is derived from the Wyckoff Method, a technical analysis approach based on the trading principles and techniques outlined by Richard D. Wyckoff in the early 20th century. In the context of the Wyckoff Method, a Spring is a price movement below a support level that quickly reverses and moves back into the range, signifying a potential bullish move. An Upthrust is a movement above a resistance level that fails and falls back into the range, indicating a potential bearish move. Here’s how you can trade using the Spring and Upthrust strategy:
Trading a Spring (Bullish Scenario):
- Identify the Trading Range: Look for a sideways market where prices oscillate between clear support and resistance levels.
- Wait for the Spring: A Spring occurs when the price briefly falls below the support level but quickly reverses into the trading range. This false breakdown is intended to shake out weak holders before a bullish move.
- Entry Signal: Enter a long position when the price returns to the trading range after the Spring. An increase in volume often accompanies the reversal.
- Stop Loss: Place a stop loss just below the low of the Spring to minimize risk if the move fails.
- Profit Target: Set a profit target near the top of the trading range or higher if you anticipate a new uptrend.
Trading an Upthrust (Bearish Scenario):
- Identify the Trading Range: Like the Spring strategy, identify a clear trading range.
- Wait for the Upthrust: An Upthrust occurs when the price rises above the resistance level but falls back into the trading range. This false breakout is seen as a sign of weakness.
- Entry Signal: Enter a short position when the price falls back into the trading range after the Upthrust. Increased volume on the reversal may confirm the validity of the Upthrust.
- Stop Loss: Place a stop loss just above the high of the Upthrust to limit risk.
- Profit Target: Set a profit target near the bottom of the trading range or lower if you anticipate a new downtrend.
Key Points for Spring and Upthrust Trading Strategy:
- Volume: The Spring or Upthrust should be accompanied by an increase in volume, particularly as the price moves back into the trading range.
- Test and Retest: The best Springs and Upthrusts often have a test of the new high or low that occurs with lighter volume before reversing.
- Confirmation: Look for confirmation from other indicators, like moving averages, RSI, or MACD, to strengthen the signal.
- Market Context: Consider overall market sentiment and trends; Springs and Upthrusts are more reliable when they align with the broader market direction.
- Risk Management: Always use risk management principles, never risking more than a small percentage of your account on any single trade, and ensure that your potential reward justifies the risk.
The effectiveness of the Spring and Upthrust strategy can vary widely depending on the market context and the skill of the trader in accurately identifying genuine Wyckoff Springs and Upthrusts. Practicing this strategy and becoming proficient in identifying these patterns before trading them with significant capital is recommended.
In the next article, I will discuss the VSA (Volume Spread Analysis) Trading Strategy in detail. In this article, I try to explain the Spring and upthrust Trading Strategy. I hope you enjoy this Spring and upthrust Trading Strategy article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.