Trading Range Break Out Strategy

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Here is a nice trading range breakout article from Alans Forex Blog.

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Range Break Outs form the basis of my core trading. Generally speaking I call most consolidation patterns a range whether it is a triangle in one of its many guise’s, a head and shoulder pattern, and so on. The point is to identify a period on the chart when price is contracting which then should lead to a period of expansion.

By keeping it simple and not trying to figure out what the pattern is called I can reduce the thinking time significantly and the actual time involved whilst trading as a pattern develop and progresses through its various stages of development as one pattern develops into another and different (text book) rule sets need to be applied.

What I am therefore interested in is where are the consolidation patterns extreme levels of support and resistance.

This way I can treat them all in the same way and not have to worry about what it is called, has it broken a trend line?

Is it a genuine break of the pattern? This list of questions can go on and on depending on the pattern and how price action develops.

The two range patterns that I distinguish between are;

Intraday or overnight ranges

Swing or Longer term ranges

The only notable difference between the two set ups is the way I identify a target.

Once the range has been identified I can then think about how best to go about trading it. Generally speaking the move into the range dictate the most likely direction of the break out move, 65% of the time it is a continuation pattern 35% of the time it is a reversal pattern.

With this figure in mind, if the move into the range is up I will be looking for reversals off the low (more on this later) and break outs of the high of the range.

Rules for trading the range once identified.

  • Trade the first pullback after the break out of the established range.
  • Stop loss goes past the event that caused me to get into the trade
  • Targets for intraday trades are based on an average days movement
  • Targets for swing trading (longer term) ranges are the height of the pattern added to the break out point.
  • Range consideration

    Ideally the overnight range should have developed near the previous days high or low for higher probability trade set ups.

    If the overnight range is in the middle of the previous days high low range then this becomes a lower probability set up. (usually price will be consolidating in the bigger picture)

    If price is in the middle of a larger range then it is also not the best location to look for a trading opportunity. Waiting for price to be at the range highs or lows and assess for reversals or breaks is the highest probability option.

    Intraday example

    Looking at a quick example, once the overnight range has been identified and in an “ideal” location I am now waiting for the pattern to “break out” of its consolidation

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    Once price has broken out of the range, to avoid getting into a false break out situation, to enter the trade I am looking for the first corrective bar or a “pullback”. My current usual routine is to start looking for this pullback on the 89 tick chart. (if you dont have access to tick charts then a 2 or 3 minute chart will work just as well). After this IF the pullback develops but does not trigger the entry order I will then move up to the next time frame as price continues to develop a pullback on the 15 min chart then the 60 min charts.

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    Now my entry has been identified by the first pullback after the break out the stop loss, also identified by the same pattern, is going past the event that caused me to get into the trade.

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    The way that I currently manage my trades is to remove the risk on the trade by scaling out a portion of the position. This is a simple formulae.

    I trade in multiples of 3 lots, I will look to remove 2/3rds at 50% of the size of the stop loss size. For example, If I have a 30 pip stop loss 50% of the stop loss size is 15 pips, 2/3rds of the position will be removed at +15. The last 1/3rd of the trade remains with its original stop loss level. If this last 1/3rd gets stopped out then I will have overall a break even trade.

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    Swing example

    Following the same philosophy, identify the range, wait for price to trade past the range boundaries. wait for price to pullback this creates the entry and stop loss levels. Target is the height of the pattern added to the break out point.

    Identify range

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    Wait for break out of the range to establish entry and stop loss levels

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    Entry established beyond the pullback. Stop loss goes past the event (pullback high)

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    Target is the height of the pattern added/deducted to the breakout point

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    Wait for trade to hit target.

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    By Philip Newton

    www.trading-strategies.info

    Philip Newton is a professional trader and teaches new and experienced traders the skills needed to trade for a living. His live chat room is amongst the best in the industry. Inside the members area traders can watch videos of his trades and receive support for any question they may have. The live trading room is the heart of the website where the real learning begins. www.trading-strategies.info

    2 x +15 = 30 pips
    1 x -30 = -30 pips
    Profit on overall position = 0 pips
    After this I have a risk free trade and my final target is based on an average days movement (discussed previously)

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