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Price-Action Trading Strategy

Trading-Ranges & Breakouts
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The financial markets ultimately move in 2 ways; they are either ‘trending’ or they
move in ‘ranges’. It is commonly known that most financial markets will only
trend for 1/3 of the time and 2/3 of the time they are trading inside a well-
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defined ‘range’ of prices on a chart.

Trading-ranges are one of the most challenging aspects of trading because they
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go against our natural instincts as human beings, and understanding how to
identify and trade them correctly will dramatically improve your results in any
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market you chose to trade.

What is a trading-range?
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Trading-ranges are where the buyers and sellers are ‘balanced’, and trading-
ranges may last a few seconds, minutes, hours, days, weeks, or even months in
some of the financial markets.
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A trading-range is defined by a lack of new higher-highs or lower-lows, over-
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lapping candlesticks, flat moving-averages and a sideways movement on the chart
you are trading.
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Furthermore, a ‘doji’ (range-candlesticks) is considered to be a very short-term
trading-range, and we see entire days or weeks of time that are considered one
big trading-range and they will all be defined and traded the same way.
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 How to define a trading-range:

Trading-ranges are usually very easy to see on a chart; look for sideways price-
action with a flat moving-average and you can usually find a good area to start
looking for a trading-range.
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Finding the area of the trading-range is the easy part; defining the exact highs
and lows of the trading-range is the more challenging part, and that is where
you want to focus your time and efforts.
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Here are the four (4) steps to finding the highs and lows of a trading-range:

1. Find the general area: Find the area of the trading-range on the chart; look
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for flat moving-averages, overlapping candlesticks, sideways movement,
and the inability for price to make new higher-highs or lower-lows.
2. Find the Highs: Draw a horizontal line on the chart at the highs of the
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range where you see the most number of times the line is ‘tested’ as
resistance.
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3. Find the Lows: Draw a horizontal line on the chart at the lows of the range
where you see the most number of times the line is ‘tested’ as support.
4. Use the Wicks and bodies: look closely to where you see the candlestick
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wicks and bodies lining up at the same price level and that is where you
want to draw the highs and lows of the range.
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Trading-Ranges ‘Rotation’:

Trading-ranges are areas on the chart where the buyers and sellers ‘agree’ on a
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range of prices, and therefor price will move easily from top to bottom and
bottom to top of this trading-range.

Trading-Ranges as Support and resistance:

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It’s important to make note where this trading-range appears on the chart, most
importantly the highs and lows of the trading-range because it can be used later
in the day as support and resistance for profit-targets.
 Defining the ‘directional bias’ of the trading-range:

Look at the direction the market was moving when the trading-range developed
on the chart, and that will define the ‘directional-bias’
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Defining Range-Expansions:

Once you have defined the trading-range highs and lows, you can use the size of
the trading-range to project levels of support and resistance into the future.
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Trading-range ‘expansions’ are very effective for profit-targets after a breakout,
and you can use the 100%, 200%, and even 300% range-expansion levels into the
future.
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Range Over-shoots and Under-shoots:

Trading-ranges act like sideways channels, which means we can use the same
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principles of ‘overshoots’ and undershoots’ as well.
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Using ‘overshoots’ and undershoots’ allow us to define where we can expect
breakouts to fail for ‘trap’ trading opportunities going with the directional-bias.

Trading-Range Breakouts:
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It is very important to know that the first attempt to ‘breakout’ of a trading-
range is almost always a failure, so you will be wise never to trade the first
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‘breakout’ of the range.
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Wise traders look for trading opportunities with ‘breakout-failures’ each time the
market tries to breakout of the range, waiting patiently for price to collapse back
into the range for an easy profit when it agrees with the ‘directional-bias’ of the
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range.
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 Best ways to trade the trading-range:

 Directional-Bias: Always know the directional-bias, and look for failed-

breakouts that go against the bias and pullback trades when the breakout
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goes with the bias.
 Look for ‘traps’: always expect the first attempted breakout to fail, and
use the directional-bias to look for ‘traps’ to trade in the correct direction.
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A ‘trap’ is triggered when a breakout fails, and closes back inside the
range, in the direction of the bias.
 Use the ‘breakout-pullback’: Look for a breakout in the direction of the
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bias and wait for price to ‘pull back’ and re-test the highs or lows of the
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range before entering in the same direction as the bias. Wait for a clear
sign for entry, buying long with a green candle and selling short with a red
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candle.
 Use the Range-Expansions for traps and targets: Project the 100%, 200%,
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and 300% extensions of the range as support and resistance on the chart
and use those price levels for areas to look for breakout traps as well as
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profit-targets.
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