Trading the Expansion Bar Signal

What Is the Expansion Bar Signal?

An expansion bar is a bar on a price chart that represents a wider price range compared to the bars for price movements of previous days.

The expansion bar signal occurs when a price bar closes near the intraday high or low. It is an indicator in technical analysis that traders watch for because it can serve as an alert for noteworthy price movements and changes in market conditions.

Observant traders can use the expansion bar signal to make profitable buy and sell decisions. 

Key Takeaways

• Expansion bar signals can indicate price movements and changes in market conditions that could be noteworthy.
• An expansion bar represents a greater-than-average price range.
• A major wide-range expansion bar can result from legitimate breakouts, which can draw in market participants and push up volume.
• Expansion bars without high volume may signal a coming reversal.

How Expansion Bar Signals Work

These wide range bars, which indicate greater-than-average price ranges at key market intersections, may confirm major price developments, such as a successful or failed test at a moving average.

At other times, they can signal a sharp increase in momentum, with one side giving in and allowing a trending security to surge higher or lower quickly because the friction of opposing positions has been removed from the system.

Breakouts and High-Volume Expansion Bars

Moreover, legitimate breakouts and breakdowns should elicit at least one major wide range bar because the security is pushing beyond an easily observed boundary, like a trendline or horizontal resistance level.

In turn, this should encourage a large number of market participants to come off the sidelines in an emotional act that yields greater-than-average volume.

Conversely, the lack of a high-volume expansion bar during a breakout or breakdown generates a notable divergence that tells us to watch for a reversal that traps the trend-following crowd.

While it isn’t necessary for the bar to appear on the day of the breakout or breakdown, it should appear within the broader set of price bars that form the rally or sell-off wave. 

Note

Intraday trading ranges naturally expand and contract over time as market players battle for directional control or when a trending security attracts a stream of buyers or sellers.

Expansion Bar Signals at Moving Averages

Price moves into the 50- or 200-day exponential moving average (EMA) create special conditions for wide range bar signals that traders can use for timely entry or exit, depending on the outcome.

Patience is required because the testing of price levels can unfold over many weeks, during which price bars congest as bulls and bears fight for domination.

This conflict can produce multiple signals, with bars expanding away from the moving average on higher-than-normal volume and then reversing gears into another test.

Multiple Expansion Bars Build to Reversals or Continuations

Each expansion bar adds to an underlying theme that eventually yields either a sustained reversal that continues the trend in place prior to the test or a sustained continuation move that breaks the moving average.

The complexity of this testing process and its multiple incarnations can fool less-prepared traders who jump on each wide range bar and then get whipsawed in the opposite direction.

How To Improve Timing

You can improve trade timing with expansion bar signals by looking for a volume surge that shows high emotional levels.

In addition, a 5,3,3 Stochastic indicator improves results after extended tests, with the observant trader watching for the final thrust to coincide with a bullish crossover for a rally and bearish crossover for a decline, preferably aligning with overbought and oversold levels.

It’s easy to see how expansion bar signals could have benefited your bottom line when real estate giant CBRE Group ground through three tests at the 50-day EMA in a four-month period:

1. In December, the price bounced at the moving average after an extended test, posting the widest range bar in two weeks on increasing volume, as Stochastics showed a bullish crossover at the oversold level.
2. In February, it completed a successful 12-day test by gapping above the moving average on the highest volume in eight sessions and posting the widest intraday range in three weeks. Again, Stochastics showed a bullish crossover at the oversold level.
3. In March, it ended a six-week consolidation on top of the moving average with the widest range bar of the year. Stochastics jumped into the overbought level in a “Stochastics Pop” buy signal (popularized by Jake Bernstein in his 1995 book “The Compleat Day Trader”).

How Should an Investor Interpret an Expanding Price Bar?

Expanding price bars can signal greater than normal market activity, changes in momentum, and the possibility of breakouts or breakdowns. Investors and active traders aware of the action can watch the direction of prices at that time for a substantial movement.

What Does an Expanding Price Bar Mean?

An expansion bar is a bar on a price chart that is taller than other bars. The difference in dimension indicates a wider range of intraday price movement. It can attract the eye of traders who decipher the reason for the expanded range and perhaps use its occurrence as a signal to take a position in the market.

Are Expansion Bar Signals Reliable?

Perhaps not always on their own. For confirmation, it’s important to consider overall market conditions, price action surrounding the day that a signal occurs, and other technical indicators.

The Bottom Line

Expansion price bars can carry with them a wealth of information that can inform trading activity. They often generate important signals that traders can use to enter or exit the market effectively.