Wednesday, November 2, 2011
Trading range day as a series of fBO
Since most days are trading range days, the trader needs to have a realistic expectation of what happens once the market takes out the high or low of the day or a significant swing point. Usually, the breakout is expected to fail, but the precise entry point to trade the failed breakout should be determined after two failed attempts to continue in the direction of the breakout.
For example, the strong breakout above HOD on b16 stalled and the market failed to continue twice (b20,b22) in a horizontal flag that effectively acts as a final flag. At this point, it should be clear that the market will attempt to re-test the low and you should no longer look for long trades.
The break below LOD on b43 was on a large bar, but the second attempt to continue the selling failed giving a double bottom at b47,55. At this point, until the DB is taken out, the market is expected to test the high once again.
Trading range days may be viewed as a series of failed attempts to generate a trend after breaking to a new high or low. Naturally, a two or three legged approach to the high or low without breaking out can also be treated as a fBO.
Occasionally, the breakout will give a successful BP, which can lead to a trend, especially after a DP on the other end.