Trading Ranges

[SlowlyButSurely]

This is a trading method I have used and tweaked over the last year or so and have had quite a good bit of success with it. I figured that I would share it so that people trading in a similar way could pick up bits from it and perhaps see if there’s some value in here to complement their system. I find it a useful strategy in ranging markets and post news events.

Before starting I should note some rules I adhere to with this strategy:

- I do not trade ahead of news events. I only trade the reaction to them.
- I tend to avoid trading on Mondays; I prefer the market to take a direction before entering.
- I will close trades ahead of the weekend whether winning or losing and try not to hold on nights where the roll charges are double (Wednesday for most FX pairs which are T+2).


I trade FX primarily, but also like to trade Gold as it has seen some good volume and volatility in recent years; and occasionally Indices. With that said, I’m sure you could use this strategy in a variety of markets but I think it would work best in markets that are sensitive to technical analysis.

 

[SlowlyButSurely]

The Technique

The first stage of the trading process involves looking for key areas of support and resistance. I like to do this across multiple time frames for reasons I will explain.
Starting on a larger time frame of the daily and weekly charts, I will plot horizontal lines of support and resistance that have shown significance in the past time and time again. These will be my major levels of significance (See Chart 1 - USDJPY Daily). Moving forward, I will go into the 30m and 1hr timeframes and look for more recent levels of support and resistance. These take a little more intuition and time spent watching your market, but they work in a similar way. Chart 2 (USDJPY 30m) shows a recent trend I marked off in the USDJPY pair. You can see that I chose several levels that had shown signs of support and resistance. It is important to remember these are zones and not definitive price levels.

This is where the next stage comes in. Using the support and resistance levels is not enough on its own. We use this initially to gauge where price will start to give us clear signals of intent, which we then analyse using price action. Often when prices reaches (or is drawn to) significant levels of S/R we will see price become quite unstable, darting upwards and downwards as the bulls and bears fight and orders get triggered. If price holds well, I will usually enter my trade.

This is a little complicated to try to teach/explain as much of it is based on intuition and just past experience watching the charts for a long time but one thing I can try to explain is that when price is ready to make a large move there is often a ‘moment of silence’ – where price suddenly stops jumping around and just halts, pausing for a second or two before it then spikes through the level eating up all the orders, or falls away, exhausted in its efforts. I try to make this my window of entry, but it is easier said than done and there have been plenty of times I have hesitated, frozen, and missed the window. If you do, just wait for the next chance; do not chase the trade!

Much of learning price action is all about time spent watching price action. It sounds like a cop-out and elusive but honestly it is the truth. I am still learning myself and am no expert, but slowly I have started to pick up discrete clues as to what is happening within the charts just by watching price at certain points.

 

[SlowlyButSurely]

The Risk Management

So obviously whether new or old in the trading game we have heard of the importance of risk management but from reading posts from new traders here and indeed from my own struggles understanding this in the beginning it is easy to make mistakes in this area so I will outline my own personal approach:
I will often look for small profits whilst risking a smaller amount of capital. I also look for tight plays, risking just 5-15 points for moves anywhere from 8-30 points. I do this because I found that aiming too big left me missing out on profits too often and on top of that it meant a trade could last several days at which point swaps became a big issue.

In Chart 3, I have made a screenshot of my current open trade in the S&P500. I took this trade as price has reached an all-time high, a significant previous level of resistance and I think it offers a good opportunity to go short, catching a potential retracement whilst buyers rest to re-group before pushing higher. If you look at the chart you can see I use quite a conservative Stop Loss (SL) and have placed my Take Profit (TP) at a previous level of support.

I use a conservative SL because a push much higher will prove my theory and reasoning wrong and if I am wrong, I need to close out of my trade. Simple!
Placement of the TP is also important here. I want to have it above a point I know it is likely to revisit. Any lower and it may never reach my target, and higher and I could miss out on potential profit. With this said I like to monitor price always, as it approaches my TP it may hold just above, at which point you may see through PA that price is likely to rise again and may exit prematurely. I say that this is fine if your profit is greater than the initial risk of the trade.

Your Risk:Reward ratio should always be greater than 1:1 so that if you only get 50% of trades right, you are still profitable. The technique I have shown and tried to explain should allow you to risk a relatively small amount of capital for a decent gain. It may not sound much but if you are able to risk 10 points for a gain of 15 then getting one right and one wrong each day will still leave you up 5 points. With £5,000 capital, trading just £5 per point (1% risk) would net you £25 per day which over 150 trading days in the year (low as some days no setups will show themselves) then you would make £3,750.

Of course these are fictional figures used simply to illustrate a point, but it is important to put significance on the R:R ratio as it is vital to be successful. Taking a trade and getting it right are hard enough. No matter how good you are you will get them wrong so having a good R:R ratio is key in my opinion.

 

[NVP]

interesting work - keep it coming

N

 

[SlowlyButSurely]

Trading Pullbacks

Another part of my strategy is trading pullbacks to jump in and out of a trend. It is a lot harder to explain this approach as it is discretionary really but someone who gives some great insight and theory on the subject is Linda Raschke. I have read a lot of her material and although I am not a swing trader, I like her approach to trading pullbacks and dips.

Anyway, let's look at an example to highlight some trades I took today (some were posted live on a thread here) and why I chose to trade them.

The first attachment shows the support level around 1268 which was broken yesterday. It was significant as it was the lowest low posted 24.04.2014 and so there would likely be some stops placed just below by traders who had long positions in the market. Once this level had broken and price drove downwards, we almost certainly were going to see a test of this level to see if sellers would use it as a base to sell more and push price lower.

The process therefore was the same as before when trading the ranges, looking for a level and then watching price action as we approach the level. Seeing price hold firm here around 1267, I went short with the aim to get out just before the previous low at 1261, with a SL above 1268. The trade worked out and I got out at 1262.

As price tested 1261, it broke it slightly before retreating back upwards. Here I waited again to watch the price action. 2 things told me that price was still weak and could go further:

1) As price struggled as buyers and sellers made their moves, price would rise steadily but fall a lot more rapidly tick by tick.
2) Before the spike downward, price rose to 1264 which had been a previous intra-day level of support too.

I sold around 1262's to re-enter with a SL above 1264's to catch the second move and a few minutes later it came (See chart 2). I got out after the spike around 1259's and although it reached 1256 price often retraces after a spike so I wanted to lock it in.

Often trades like this can go wrong, but as long as you have a tight stop and can see there is room for price to move enough in your favour for good R:R then it is worthwhile in my opinion.

I would like to add too that on my second trade as I tried to re-enter Gold, I initially sold at around 1261.5 as I believed price action was indicating the move was coming. I got stopped out and was a bit more patient waiting for a better opportunity which came a few moments later. There will always be losses but managing them well and adjusting to the market is important as I learn again and again.

 

[SlowlyButSurely]

@ NVP there is not much else to add regarding my strategy. It is pretty simple really in essence, it relies mostly on watching and getting a feel for price action.

Advice I would give is to stick to markets you know if using PA as you really do need to get a feel for it. I only trade EURUSD, GBPUSD, USDJPY, AUDUSD and XAUUSD. I sometimes dabble in other FX pairs but I am not usually as successful so stick to what I know. I have tried and failed in Indices so far

Feel free to ask questions though and I'll respond as best as possible.

 

[tar]

So obviously whether new or old in the trading game we have heard of the importance of risk management but from reading posts from new traders here and indeed from my own struggles understanding this in the beginning it is easy to make mistakes in this area so I will outline my own personal approach:
I will often look for small profits whilst risking a smaller amount of capital. I also look for tight plays, risking just 5-15 points for moves anywhere from 8-30 points. I do this because I found that aiming too big left me missing out on profits too often and on top of that it meant a trade could last several days at which point swaps became a big issue.

In Chart 3, I have made a screenshot of my current open trade in the S&P500. I took this trade as price has reached an all-time high, a significant previous level of resistance and I think it offers a good opportunity to go short, catching a potential retracement whilst buyers rest to re-group before pushing higher. If you look at the chart you can see I use quite a conservative Stop Loss (SL) and have placed my Take Profit (TP) at a previous level of support.

I use a conservative SL because a push much higher will prove my theory and reasoning wrong and if I am wrong, I need to close out of my trade. Simple!
Placement of the TP is also important here. I want to have it above a point I know it is likely to revisit. Any lower and it may never reach my target, and higher and I could miss out on potential profit. With this said I like to monitor price always, as it approaches my TP it may hold just above, at which point you may see through PA that price is likely to rise again and may exit prematurely. I say that this is fine if your profit is greater than the initial risk of the trade.

Your Risk:Reward ratio should always be greater than 1:1 so that if you only get 50% of trades right, you are still profitable. The technique I have shown and tried to explain should allow you to risk a relatively small amount of capital for a decent gain. It may not sound much but if you are able to risk 10 points for a gain of 15 then getting one right and one wrong each day will still leave you up 5 points. With £5,000 capital, trading just £5 per point (1% risk) would net you £25 per day which over 150 trading days in the year (low as some days no setups will show themselves) then you would make £3,750.

Of course these are fictional figures used simply to illustrate a point, but it is important to put significance on the R:R ratio as it is vital to be successful. Taking a trade and getting it right are hard enough. No matter how good you are you will get them wrong so having a good R:R ratio is key in my opinion.

All this is theoretical after all ,

A stoploss protects you and limits your losses in one trade but doesn't necessarily protects your account in the long run , infact it could be the reason for losing the whole account in the future .

R:R : The problem here is your win rate is highly influenced by your R:R , based on your example aiming for 15 and risking 10 while expecting to be right 50% . You pay costs for example 2 points , so to get your 15 points the market has to move 17 points in your favor and to lose your 10 points SL it only has to move 8 points , so 17 vs 8 and be right 50% i don't see that happening .

cheers

 

[SlowlyButSurely]

All this is theoretical after all ,

A stoploss protects you and limits your losses in one trade but doesn't necessarily protects your account in the long run , infact it could be the reason for losing the whole account in the future .

R:R : The problem here is your win rate is highly influenced by your R:R , based on your example aiming for 15 and risking 10 while expecting to be right 50% . You pay costs for example 2 points , so to get your 15 points the market has to move 17 points in your favor and to lose your 10 points SL it only has to move 8 points , so 17 vs 8 and be right 50% i don't see that happening .

cheers

A good point, although I trade mainly FX pairs with low spread under 1 pip. This is something important to consider too when choosing a product to trade as it is going to be detrimental to trade something which has such a large spread your chance of profiteering is hindered straight off the bat.

Note that I did state they were fictional figures, My win rate is higher than 50% but I just used it to illustrate that even with the flip of a coin; with good risk management, a solid plan and low spreads you could end up better off.

 

[tar]

Note that I did state they were fictional figures, My win rate is higher than 50% but I just used it to illustrate that even with the flip of a coin; with good risk management, a solid plan and low spreads you could end up better off.

BTW a coin flip is right 50% of the time directional wise - up or down - , but how much the market will move after that is another story , otherwise we will just flip a coin and use a tight SL .

Cheers