Why Tight Price Action is Key to Trading Success

Many top-performing traders often discuss the importance of identifying tight price action as part of their entry tactics. During a Market Leader’s run, areas with tightness of price are evidence of institutional accumulation, and create potential buy points to jump on a trend.

For Swing Traders and Positions Traders, tight price action provides:

• Clarity of entry points: A clear level to trade against, reducing risk.
• Evidence of accumulation: During a market leader’s run, tight price areas often reveal institutional buying.
• The setup for explosive moves: After a period of tight consolidation, stocks frequently expand to the upside (or downside).

Sometimes when a move is missed it may be difficult to feel confident about entering a position when traditional thinking suggests not to chase extended stocks. But what about the truly elite stocks that set up more tradable ranges as they continue their advance?

The Relative Measured Volatility Indicator uncovers several opportunities to enter the stock in a tight range even though traditional training would advise not to chase an extended stock.

Tight price action is a hallmark of strong stocks and an essential component of effective trading strategies. It represents a period where a stock’s price moves within a narrow range, often accompanied by reduced volume. This signals that buying and selling have reached a balance — or equilibrium — and the stock is “coiling” for its next major move.

When Tesla (TSLA) broke out of a two-year base in 2013, it advanced over 400% in just six months. Tight price action formed during its run provided multiple opportunities to enter the stock as it continued higher, helping traders build positions even after missing the initial breakout.

What is the Relative Measured Volatility (RMV) Indicator?

The Relative Measured Volatility (RMV) indicator, developed by Deepvue, is a proprietary tool that helps traders quickly identify tight price action. RMV measures how volatile a stock’s current price movements are compared to its recent activity, giving traders an objective way to spot coiling behavior.

How Relative Measured Volatility Works:

Relative Measured Volatility compares the stock’s current price range to its average range over a specified lookback period. A low RMV value indicates tight price action (low volatility), while a high RMV value signals price expansion (high volatility).

Unlike subjective chart reading, RMV provides a clear numerical representation of price contraction or expansion. This helps traders consistently identify setups without relying solely on visual patterns.

• Compares current price action versus previous price movements
• A value below 15: Indicates the stock’s price action is tightening. The closer RMV gets to 0, the tighter the price action.
• Value closer to 100: Indicates price volatility is expanding, signaling increased activity.
• Direction of the RMV line: A downward line shows tightening, while an upward line indicates expanding volatility.

This visual tool makes it easy to identify ideal trading areas, where price consolidation suggests potential accumulation or distribution.

How the Lookback Period Impacts RMV:

The lookback period in the Relative Measured Volatility indicator determines the timeframe over which the stock’s current price range is compared to its historical price ranges. This parameter plays a critical role in identifying tight price action and is key to customizing the indicator to fit various trading styles and timeframes.

Comparison to Historical Data:

• The lookback period specifies how many previous bars (e.g., days, weeks, or minutes) are used to calculate the average range.
• For example, a 15-day lookback period compares the stock’s current daily price range to the average range over the past 15 days.

Relative Tightness or Expansion:

• If the current range is significantly smaller than the average range over the lookback period, RMV will approach 0.
• If the current range is larger, RMV will approach 100.

Responsiveness of Signals:

• A shorter lookback period (e.g., 5 days) creates a more responsive RMV indicator, capturing rapid changes in volatility. This is ideal for short-term traders, intraday setups, or IPOs.
• A longer lookback period (e.g., 50 days) smooths out short-term noise, making it more suitable for position traders or longer-term analysis.

How RMV Reveals Buy Points

The Relative Measured Volatility indicator helps reveal buy points by identifying tight price ranges, which are often precursors to significant price movements. Take a look at the same TSLA breakout with the RMV Indicator at the bottom of the chart.

After Tesla’s breakout from its two-year base, RMV revealed additional buy points during the stock’s continued uptrend. These points were marked by tight consolidations, where the RMV indicator dipped below 15, indicating reduced volatility and potential accumulation.

If you miss a breakout or a gap-up, there will always be another opportunity presented to find a way into a stock. The RMV indicator helps traders avoid the fear of chasing extended stocks by highlighting new opportunities to enter during tight ranges as the stock advances higher.

Tight price action are indicated as the RMV value approaches 0. These tight areas reflect an equilibrium between buyers and sellers, suggesting accumulation or preparation for a breakout.

Place a pivot point at the high of the tight range where the Relative Measured Volatility converges near zero. Enter when the price breaks above this pivot on increased volume.

How Tight Price Action Helps Control Risk

Tight price action is a powerful tool for controlling risk in trading because it creates clear entry points and well-defined stop-loss levels while improving reward-to-risk ratios.

Defines a Clear Risk Point

• Tight price action occurs when the range between a stock’s highs and lows narrows significantly over a few days or weeks.
• This tight range provides an obvious low to base your stop-loss and a clear high to identify an entry.

Allows for Tighter Stop-Losses

• Tight price action minimizes the size of the range, reducing the potential distance between the entry point and the stop-loss level.
• This smaller range lowers your overall risk at entry.

Improves Reward-to-Risk Ratios

• The smaller risk from tight price action allows for a higher reward-to-risk ratio.
• If a stock has a 2% stop-loss with a potential gain of 10%, the reward-to-risk ratio is 5:1. Compare this to a wider range where a 5% stop-loss might reduce the ratio to 2:1.

Indicates Institutional Accumulation

• Tight price action often signals that institutions are absorbing supply.
• This accumulation creates a price floor that can act as a natural support level, further reducing downside risk.

RMV is best used following a natural base building price cycle. Look for tightness of price at the bottom of a base, up the right side, and during the first pullback after a traditional base breakout.

No matter where on a chart, tight price areas give traders a defined stop-loss level, minimizing potential losses while offering an ideal reward-to-risk setup.

Using RMV to Identify Buy Points

Relative Measured Volatility Identifies Ideal Entries on Traditional Basing Formations

Look for tight price action at key areas within a stock’s natural base-building process:

• At the bottom of the base: Tightness here often signals the end of selling and the start of accumulation.
• Up the right side of the base: Consolidations in this area set the stage for a breakout.
• After a breakout: Stocks often pull back or trade sideways in tight ranges after breaking out, offering additional buy points.

Peloton (PTON) surged nearly 700% in 7 months after bottoming in 2020. The RMV indicator highlighted multiple tight price areas during this advance, providing ideal pivot points to enter the stock while managing risk effectively.

Instead of buying a stock extended past a breakout, wait for an optimal area. The RMV indicator dips below 15 when the price is tight – Notice how the RMV is close to zero at other ideal buy areas.

Relative Measured Volatility Uncovers Entries in Trending Stocks

Even after a stock is trending, RMV can uncover new buy points during periods of tight price action.

Following a gap-up on earnings, Abercrombie & Fitch (ANF) climbed 350% in 10 months. The RMV revealed tight areas where the stock moved sideways during its advance, signaling low-risk entry opportunities.

Rather than buying during volatile moves, RMV highlights optimal buy points when the stock pauses in tight formations.

After a gap up, the price may trade in a tight range with RMV displaying a low value, but a clear pivot hasn’t developed yet. Remember to use this as a tool to help identify tight areas, but continue using traditional entry tactics.

Use Relative Measured Volatility to Leverage Explosive Moves

Buying stocks in an uptrend may be intimidating as you are buying after a traditional base breakout. The RMV helps traders visually reveal tight trading ranges.

Nio (NIO) delivered an astounding 3,000% move in just 10 months during 2020. These points allowed traders to build positions as NIO stair-stepped higher, all while maintaining clear stop levels for risk management.

Throughout leadership runs, watch for when the RMV indicator drops below 15, signaling tight consolidation areas.

Shorting Stocks with Relative Measured Volatility

The RMV Indicator can also help find potential areas to short against. Just like trading on the long side, when you short a stock look for tight price areas to help identify clear pivots while providing clear risk.

After UPST had an impressive IPO Advance, it eventually topped and began its 97% decline. When the market turned the ideal trade was to begin shorting stocks, (or staying out of the market depending on the type of trader you are).

RMV revealed multiple tight price areas during this downtrend, providing traders with clear entry points to short the stock while managing risk.

How to Add RMV to Your Charts

Simply type “DV” in the indicator search to find all proprietary indicators.

Relative Measured Volatility Settings: Look Back Period

The Relative Measured Volatility indicator also allows users to specify how far back to measure past volatility in price action.

By default, the look-back period is 15 bars. Change this value to align with your trading style. Some traders might want to highlight quick coils while other traders may only want to highlight more standout tightening.

• Day traders: Use a 5-period look-back to highlight quick coils (e.g., after earnings gaps or IPOs).
• Swing traders: Stick with the default 15-period look-back.
• Longer-term traders: Use a 50-period look-back to capture tightening areas on longer trends.

The measurement of volatility is relative to the lookback period.

How to Screen for Stocks with Tight Price Action

As with any indicator available in Deepvue, you can use Relative Measured Volatility data points as part of your screening process. This simple screen will help you focus on the strongest stocks that are showing tightness in price action.

Use RMV data points in your screener to filter for stocks showing tight consolidations. Focus on stocks with RMV values below 15, indicating price tightening.

Key Takeaway

Tight price action offers traders a clear entry point with well-defined risk, as it reflects a balance between buyers and sellers before a major price move.

Benefits of tight price action:

• Helps control risk: Tight areas provide clear stop-loss levels.
• Identifies accumulation or distribution: Tightness often signals institutional activity.
• Reveals new opportunities: RMV highlights additional buy points during a stock’s advance.

By using the Relative Measured Volatility indicator, you can objectively identify tightening price action, helping you spot both long and short trading opportunities. Whether you’re trading breakouts, trending stocks, or pullbacks, RMV ensures you stay focused on areas with the greatest potential for success.