May 16, 2012

Trading With Daily Range Breakouts

Filed under: Expert Commentary,Technical Analysis,Trading !en Calhoun " #:$6 am
Looking for trading entries with the help of daily trading range patterns can help savvy traders spot volatile
moves for potential trading opportunities. The concept of Average True Ranges (ATR) has always een
popular! and the usage of daily trading ranges for fine tuning swing and intraday trading setups can assist
traders in identifying chart patterns worth trading.
Daily Trading Ranges: Wide versus Regular Range Patterns
"sing a fifteen#day! fifteen#minute candlestick chart for swing trading stocks can e valuale when traders
know how to spot wide vs. regular#range reakout patterns. $n %igure & 'Netflix (NFLX)(! it can e seen
that the average daily trading range! as measured from the high to the low! is aout four points on a
regular trading day. )hat traders should look for! is volatility on high volume during days in which the
trading range e*ceeds the average trading range! for suse+uent reakouts.
%or e*ample! in %igure , (-%L.)! a wide#range day occurred on /ay &&! ,0&,! with a range of (12 3 1,) 4
5 points! which is a 607 wider trading range than usual. This is the first indication that potential
institutional accumulation is occurring! so traders can keep this chart on the watchlist for potential
reakouts (or reakdowns)! following this wide#range day.
Typically it8s a good idea to follow a swing trading chart for 9 to 6 days following a wide#range high volume
day! for potential entries in either direction outside the current consolidation region. The main thing to
visually scan for is those e*ceptional wide#range days (at least 907 wider than usual) on higher volume!
as a precedent for upcoming volatility.
How to Manage Trading Entries Using Wide-Range Patterns
:eveloping the visual pattern recognition skills to identify wide#range versus regular#range trading days
can e helpful in making trade management decisions as well. %or e*ample! if a trader had ought an
initial position at ;ust over <16 in %igure ,! on a cup reakout! the suse+uent wide#range day would e
an ideal time to add to a winning open long position.
$f a trader has not yet entered position and yet sees a wide#range day! then it8s an e*cellent time to keep
the chart on the watchlist to potentially enter on new high reakout continuations. Adding into a winning
position that continues up past a wide#range day is also a useful strategy for scaling in to a successful
trade.
=onversely! if on a swing trading chart the price action starts to decrease significantly narrower than a
regular daily trading range pattern! for e*ample on /ay &6th! in which the trading range is ;ust (1> 3 11) 4
, points! then that is a signal that volatility is decreasing! and a tight trailing stop should e used.
Co!aring Relative Trading Ranges and Making De"isions
Traders often struggle with uncertainty in their trading decisions! second#guessing their entries and e*its.
?y comparing the daily ranges on a swing trading chart against each other (to see regular vs wide#range
days)! traders can easily spot whether or not volatility is increasing or decreasing.
)henever trading ranges start to widen! especially on higher volume! then that8s a technical signal that
the instrument is worth considering for potential trading opportunities! since new volume and volatility is
driving price action. @ood traders are primarily focused on price and volumeA and when one or more of
these start to e*pand eyond usual ranges! then a trading signal is generated! which makes sense for
traders to take action on.
:eveloping the skill to +uickly spot what8s the trading range done! latelyB on a day#y#day asis can
help traders determine whether or not a trade is worth taking! and in which direction. These daily range
comparisons provide another tool for active traders to use in potentially navigating successful swing
trading entries and e*its.