May 16, 2012

Trading With Daily Range BreakoutsFiled under: Expert Commentary,Technical Analysis,Trading — Ken Calhoun @ 8:46 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 been

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

Using a fifteen-day, fifteen-minute candlestick chart for swing trading stocks can be valuable when traders

know how to spot wide vs. regular-range breakout patterns. In Figure 1 [Netflix (NFLX)], it can be seen

that the average daily trading range, as measured from the high to the low, is about four points on a

regular trading day. What traders should look for, is volatility on high volume during days in which the

trading range exceeds the average trading range, for subsequent breakouts.

For example, in Figure 2 (NFLX), a wide-range day occurred on May 11, 2012, with a range of (78 – 72) =

6 points, which is a 50% 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

breakouts (or breakdowns), following this wide-range day.

Typically it’s a good idea to follow a swing trading chart for 3 to 5 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 exceptional wide-range days (at least 30% wider than usual) on higher

volume, as a precedent for upcoming volatility.

How to Manage Trading Entries Using Wide-Range Patterns

Developing the visual pattern recognition skills to identify wide-range versus regular-range trading days

can be helpful in making trade management decisions as well. For example, if a trader had bought an

initial position at just over $75 in Figure 2, on a cup breakout, the subsequent wide-range day would be

an ideal time to add to a winning open long position.

If a trader has not yet entered position and yet sees a wide-range day, then it’s an excellent time to keep

the chart on the “watchlist” to potentially enter on new high breakout 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.

Conversely, if on a swing trading chart the price action starts to decrease significantly narrower than a

regular daily trading range pattern, for example on May 15th, in which the trading range is just (79 – 77) =

2 points, then that is a signal that volatility is decreasing, and a tight trailing stop should be used.

Comparing Relative Trading Ranges and Making Decisions

Traders often struggle with uncertainty in their trading decisions, second-guessing their entries and exits.

By 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.

Whenever trading ranges start to widen, especially on higher volume, then that’s a technical signal that

the instrument is worth considering for potential trading opportunities, since new volume and volatility is

driving price action. Good traders are primarily focused on price and volume; and when one or more of

these start to expand beyond usual ranges, then a trading signal is generated, which makes sense for

traders to take action on.

Developing the skill to quickly spot “what’s the trading range done, lately?” on a day-by-day basis 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 exits.