The market is constantly seeking equilibrium, which means a price where buyers and sellers find it worthwhile to place a trade. They need to believe they’re gonna make money, say Al brooks from BrooksTradingCourse.com.
It means an area of ââconfusion, a trading range, because otherwise how could the bulls and bears sense that the price is right?
It constantly probes up and down while trying to determine the area of ââfair price. Most of these rallies and sellouts fail and the market stays in the range. Sometimes one leads to a breakout, which means that bulls and bears are no longer confused. They agree that the price is too high in the case of a bear breakout, or too low in a bull breakout. The market then quickly moves to a new area of ââconfusion, which is another trading range, where the bulls and bears feel the price is about right.
Market cycles between trends and trading ranges
Price action is an endless market cycle of trends and trading ranges. Trends start with a breakout. Once the withdrawals start, the trend moves from the trend break phase to the trend channel phase. This is followed by an increase in two-way trading and the move towards a trading range.
The seeds of the next trend are planted in each trading range, and once you’ve learned to read the buying and selling pressure, you are able to anticipate the next successful breakout. As soon as there is a break up or down, the process begins again.
In the trading range, buy low, sell high, scalp
Once the market appears to be in a trading range, BLSHS traders. It means buy low, sell high and scalp. Buying low can mean taking profit from a short position or buying to take a long position. Selling high can mean taking profits from a long position or starting a short position.
A pullback that exceeds 20 bars loses most or all of the influence of the trend that preceded it, and the probability of a trend reversal becomes the same as that of a trend resumption. Once there is a successful breakout in either direction, the process begins again.
When the market is within a trading range, traders only need BLSHS. They should avoid placing trades in the middle third (the gray area) of the range.
Most escape attempts fail
The bargaining forks always seem to be on the verge of bursting. Large rises cause traders to buy high (remember, you should only sell high!), As they will assume that the large rise will have a second rise after any pullback. Strong legs cause traders to look for shorts at the lower end of the range, again because the move seems so strong it falsely makes them believe there will be a successful breakout.
Again, this is the opposite of what experienced traders will do. People are naturally hopeful, and it takes time to overcome the tendency to believe that a strong escape attempt will be successful. These strong rallies are simply buying voids which are testing resistance at the upper end of the range, and strong selling is caused by support at the lower end of the range sucking the market in for a test.
The market is sucked up and down the range, but there is no tracking. Newbie traders are constantly tricked into buying big bullish trend bars at the top and shorting big bearish trend bars at the bottom because hope is part of our nature. Traders are hoping for the next trend, but the markets are inert and when a market is in a trading range 80% of both upside and downside breakouts will fail.
Narrow negotiation ranges
A trading range is simply a horizontal channel and like other channels it can be wide or narrow. When a trading range is wide, traders can enter with stops, sell high and buy low.
They can also mitigate breakouts by placing sell limit orders above previous highs to go short and buy limit orders below previous lows to go long. They can also mitigate breakouts by simply shorting strong bullish closes at the top of the range or buying strong bearish closures near the bottom of the range, rightly expecting those breakout attempts to be 80. % chance of failing.
When they sell at the top, they do so either to take profits on purchases they bought lower in the range or to initiate short positions. When buying low, they take profits on shorts they have sold higher in the range or to initiate long positions.
Most shouldn’t trade
When a trading range is tight, most traders shouldn’t be trading. Experienced and aggressive traders will scalp with limit orders, buying below the bars in the lower third of the range and scaling down, and short selling above the bars in the upper third of the range and moving up. . However, whenever the range is too narrow, they have to wait for a breakout to the higher or lower. An example of a tight trading range that is too tight is one where the height of the range is only double the size of a scalp.
Sometimes a trading range can be extremely tight, with many bars only 1 tick high, while still having a big breakout on huge volume. It’s a reminder that institutional computers are still around. The 1:00 p.m. counted 77,000 contracts! Just as it was a very profitable opportunity for them, so can it be for us, if we are willing to negotiate.
The tight trading range was a breakout mode setup, meaning a breakout and swing trade were likely, but it could be either way. There could have been an upward trend reversal. Here there was a resumption of the downtrend (the downtrend from before the resumption of the tight trading range with the breakout of the downside below the tight trading range).
Read more about Al Brooks at Brooks Trading Course.