Trading ranges are patterns with a message - Soon enough, prices are going to breakout or breakdown from the range. Such moves out of the range are likely to be profitable.
Consider the issues involved in trading these breakouts. (I mean breakouts and breakdowns when I refer to breakouts.)
1. When do you enter the trade?
a. Immediately on breakout
b. On pullback after a breakout.
c. In anticipation of a breakout while inside the range
Each of the choices has unfavorable consequences.
a. Immediately on breakout - The risk is of a false breakout, which pulls back inside the range.
b. On pullback after a breakout.- There may be no pullback in strong trends. So the risk is of missing the trade altogether.
c. In anticipation of a breakout - This of course runs the risk of not breaking out at all or actually breaking out in the opposite direction.
I have not mentioned the advantages of each of these entries, since readers are likely to undestand the benefits.
So, how do you trade the breakout with assurance?
Answer: Make a considered judgement by qualifying the breakout using independent tools. Then, identify the disadvantages of the entry method, and understand that there is no guaranteed outcome.
Independent tools could mean:
1. What are the other stocks in the industry group doing?
2. Is there a barrier just after the breakout which will prevent the price movement (overhead resistance for example)
3. What is the length of the trading range? A long narrow range could mean a breakout which will not look back.
4. Is price breaking out in the direction of the trend or as a reversal. Trend direction breakouts are usually more reliable.
And so on......
A. take the trade
B. Set a stop loss
C. Keep volume at sleeping level
D. Follow your rules with discipline
E. Do not worry about the eventual outcome of this trade. Remember, you will take thousands of trades, so one trade here or there is irrelevant.
And, of course, HAVE FUN.