Trading Strategies

What is the Follow Through Day?

Nick Schmidt

Nick Schmidt is a co-founder of TraderLion and Deepvue with over 10 years of market experience. Adopting a “less is more” philosophy, he focuses on weekly charts with an emphasis on price and volume.

October 14, 2024

6 min read

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What is a Follow Through Day and How Was it Developed?

A follow through day is a concept developed by William J. O’Neil as part of his CANSLIM strategy to help investors spot the early signs of a new bull market. It acts as a confirmation that a market rally, coming after a correction, or bear market, has real momentum and backing from institutional investors. O’Neil noticed that most lasting bull markets started with a solid initial rally, followed by a decisive day where the market surged on high trading volume. Before this, investors struggled to tell if a brief rally was just a quick bounce they would get caught in, or the beginning of a real uptrend. By spotting a follow-through day, traders can identify market bottoms with more confidence and start gradually re-entering with carefully chosen stocks.

Follow Through Day Criteria

Timing: A follow-through day should appear on the 4th to 7th day of an attempted rally. This period historically allows the market to stabilize and prove that the initial move is not just a short-lived reaction. Rally attempts showing strong gains earlier than the 4th day are less reliable.
Index Price Increase: A major index, such as the Nasdaq, or S&P 500, must post a substantial price gain of around 1.5% to 2% or more. This upward move signals renewed buying interest and that market sentiment is shifting, with the market showing real strength after its decline. O’Neil initially considered a 1% increase as sufficient for a valid FTD. However, as institutional investors became more aware of this system, the requirement increased to a 1.5% to 2% rise to better filter out false signals.
Volume Increase: The day’s trading volume must be higher than the previous day’s. Ideally, it should be above the average daily volume, showing that big, institutional buyers are driving the price move. This heavy trading from major players is a key sign of a reliable follow-through day, as it indicates strong demand pushing the market higher.

Strengthening the Follow Through Day Signal

Identifying a follow-through day is just the beginning. Not every follow through day leads to a lasting rally, so it’s crucial to take extra steps to confirm the market’s strength before diving back in. Here are three strategies to improve your chances of success after spotting a follow-through day:

Look for a Broad-Based Rally: Make sure the rally isn’t just driven by a handful of stocks or sectors. You want to see a broad range of stocks across multiple industries joining in. This widespread activity hints at a more significant shift in market sentiment, making the uptrend more reliable and less likely to fizzle out. Broad market participation shows that the rally isn’t dependent on one or two sectors and suggests a stronger, more reliable uptrend.
Consistent Follow-Up Action: After you spot a follow-through day, watch for continued strength in the days that follow. If leading stocks start breaking out from well-formed bases, it’s a strong sign that the rally is holding up. But if the market reverses quickly, it could mean the rally is failing, so proceed with caution.
Be Selective with Stock Picks: Even if the follow-through day looks promising, avoid rushing to buy just to buy. Focus on quality over quantity. Seek out leading stocks with solid fundamentals that are showing strong price action and are breaking out of well-formed bases, such as the flat base pattern, the cup with handle pattern, and the powerful high tight flag. Prioritize companies with strong earnings growth, competitive advantages, and positive industry trends. By choosing carefully, you’ll avoid getting caught up in weaker stocks that might not survive a market pullback.

A follow-through day is a powerful signal, but it’s not a guarantee. By looking for broad-based market strength, monitoring consistent follow-up action, and being selective with your stock picks, you can improve your chances of success. These strategies will help you make more informed decisions, reduce risk, and better position yourself for long-term gains.

Key Follow Through Day Statistics

Distribution on Days 1 or 2 after a FTD fail 95% of the time
Distribution on Day 3 after a FTD fail 70% of the time.
Distribution on Days 4 or 5 after a FTD fail 30% of the time.

Common Pitfalls to Avoid with Follow Through Days

Jumping in Too Early: One of the biggest mistakes is buying too aggressively before a valid follow-through day is confirmed. Even if the market looks like it’s rebounding, you need to wait for a proper FTD to validate the rally’s strength. Without that confirmation you risk getting caught in a false breakout.
Ignoring Weak Volume: Volume is a key part of the FTD. If you see the needed price gain in either the Nasdaq or S&P 500, without a corresponding surge in volume, it’s a red flag. It means institutional buyers—who are critical to sustaining a rally—might not be driving the move. Light volume could signal that the rally lacks real strength, so be cautious of any FTD without solid volume behind it.
Overlooking Market Breadth: A true uptrend should involve a wide range of stocks across multiple sectors, not just a few standout performers. Don’t rely on a narrow rally. If only a handful of stocks or sectors are doing well, it’s not a strong sign. A strong FTD should show broad market participation, with gains across various industries. Be cautious in a rally driven by just a few stocks.
Failing to Monitor Follow-Up Action: A common mistake is assuming that a single follow-through day guarantees a new bull market. But the days after the FTD are just as important. Keep an eye on whether the market continues to show strength, especially leading stocks breaking out of solid bases. If the market stumbles soon after the FTD, it could signal a failed rally attempt, so don’t ignore follow-up action. To quote William O’Neil, “A follow-through day is just the beginning; you need to see continued strength to confirm the uptrend”.

Effectively using Follow Through Days

The follow through day, developed by William O’Neil, helps spot the early stages of a new bull market. It helps investors distinguish real rallies from short-lived bounces, offering more confidence when re-entering the market. However, simply recognizing an FTD isn’t enough. To maximize success, you need to focus on key factors like timing, volume, and market breadth. Even when a follow-through day checks all the boxes, proceed carefully. Strengthen your approach by focusing on quality stocks only. The follow through day will help you better navigate the market, manage risk, and position yourself for long-term gains.

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Frequently asked questions

To confirm a valid FTD, look for three main criteria:

Volume: The trading volume should be higher than the previous day, ideally above average, showing that institutional buyers are driving the move.

Timing: It should occur on the 4th to 7th day of an attempted rally.

Price Increase: A major index like the Nasdaq or S&P 500 needs to rise by 1.5% to 2% or more.

Volume is crucial because it shows that big, institutional investors are involved. If an FTD occurs on light volume, it might indicate that the rally isn’t well-supported, making it less reliable. Strong volume suggests solid demand, which boosts the chances of a sustained market uptrend.

Yes, a FTD can fail. Even if it meets all the criteria, it’s not a guarantee of a lasting rally. Many FTDs can falter if the market doesn’t show consistent follow-up strength. Statistics show that if the market starts distributing (selling off) within a few days after the FTD, there’s a high chance the rally will fail. So, it’s important to keep monitoring the market closely after an FTD.

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