Are you curious how traders profit from the Average Daily Move (ADM) in the stock market? This article will provide a step-by-step guide to understanding and capitalizing on this valuable trading concept. One valuable tool for traders is the concept of the average daily move (ADM). This will walk you through what the ADM chart is, how to read it, and most importantly, how to profit from it.

Understanding the Chart

The ADM chart mentioned here is sourced from the Financial Samurai website. It provides insights into the expected daily price movement of a stock. According to this chart, the majority of stocks tend to have a daily move ranging between -1% and +1%. This range represents the normal trading behavior for most stocks.

However, it’s crucial to grasp the significance of moves beyond this range. When a stock’s daily price movement exceeds these boundaries, it signifies that something significant is happening in the market. This is where traders can find opportunities to capitalize on these extreme moves.

Recognizing Profit Opportunities

To profit from the insights provided by the ADM chart, traders need to identify when a stock’s daily move falls outside the -1% to +1% range. Here’s how you can take advantage of these situations:

1. Normal Trading Days: On days when a stock’s daily move remains within the -1% to +1% range, there’s typically no immediate action to take. This is considered a normal trading day.
2. Exceeding the Normal Range: When you see a stock’s daily move surpassing +1% or falling below -1%, it should trigger your attention. These are the moments when you can consider making credit spread trades, potentially leading to profitable outcomes.

Profitable Strategies

Let’s explore two scenarios to illustrate how you can profit from ADM insights:

1. Upward Trend: If a stock is on an upward trend and experiences an out-of-range move, such as a 1.5% increase in a single day, it indicates overextension. Subsequently, a small pullback often occurs. In such cases, you can consider placing a call credit spread trade to profit from the expected dip in the stock’s price.
2. Downward Trend: Conversely, in a downward-trending market, when you observe large candles exceeding the expected daily move, it presents an opportunity for put credit spread trades. These trades allow you to benefit from market corrections after significant downward moves.

For example, if the market has been trending downward and you encounter a day with a massive 4.7% daily move, it’s a strong signal that a reset is imminent. This presents an excellent chance to implement a put credit spread trade to profit from an expected market rebound.

Conclusion

Understanding the average daily move (ADM) and how it relates to a stock’s price behavior is a valuable skill for traders. By recognizing when a stock’s daily move exceeds the normal range, traders can take advantage of these opportunities through credit spread trades.

If you’re interested in learning more about credit spread strategies and how to profit in various market conditions, consider exploring resources like the “Ultimate Credit Spread System Course,” which covers strategies for different market types, generating monthly income, exit rules, and trade sizing.

Keep the ADM in the back of your mind as a valuable tool in your trading arsenal. Always ask yourself: “Have we exceeded the daily expected move by a significant amount?” If the answer is yes, there may be a profitable credit spread trade waiting for you.

Your journey to profitable trading starts with understanding the data and patterns that the market provides.

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Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer