Thursday, November 28, 2013

It seems simple enough

Is the success to trading being able to identify a trading range and play the breakdown or breakup?  I honestly starting to believe that type of strategy is all it takes to make a few bucks at this stock market game.  I talked in the past about the break test and enter strategy which is really just the set up which begins with a break out of a range and looking for a test of the broke support/resistance area to confirm the break.  The entry is executed on a break of the previous high or for the more adventurous types (a.k.a impatience) after the test of broken support/resistance. Now that I am viewing the market in terms of trading ranges and breakouts there are a few things to understand.  First this is a high probability trade and not the holy grail you will get stopped out at times. That brings us to the next point.  Place your stop losses.  Use mental stops simple don't' work since we are greedy and fearful and highly unlikely to adhere to those mental stops. I use hard stops to take the emotion out of it. I would rather blame the market for stopping me out and taking a tiny loss than readjusting my 'mental' stop in my head a thousand times and losing big.  A mental stop is really no stop at all in my opinion.   To be successful at playing a breakout you first have to be able to identify the trading range.  PnF charts are excellent for that.  Even if you are looking for triangles or pennant patterns which I personally don't look for or use in my trading but they as valid as any other trade setup.   The awesome part about trading ranges is that you can see and trade them in anytime fame.  They are really just areas of accumulation/distribution before another directional move ensues.   The bigger the trading range and more volume transacted (think or it as fuel for the move) within the range the greater the ensuing directional move.

Lets look at the SPX 15min PnF chart below where I've highlighted the current trading range in green. You can see that the range only spans approximately 7 points therefore any breakout should move at least that much.  Remember this is a 15 min chart with an ATR of 1.15 but the point is this same logic can be applied to any time frame.  I encourage you to check out the PnF chart and look for these trading ranges and look for those breakouts.  They could prove quite profitable.

Thanks for reading.

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