A common preoccupation, bordering on an obsession, for many novice traders is the ability to identify and profit from a technical breakout that leads to a trending market. I don’t blame them for seeking the answers to questions such as “how do I know when this market is going to break?” or “where do I enter and where should I place my stop?” It seems a logical subject for discussion to which there must be a solution; how else do you make money! Unfortunately for them this preoccupation is fuelled by the retail trading industry and the trading communities on the internet that promote freely available, fool-proof systems and free training with guaranteed results. The majority of these products are trend-following in nature and make for easy-to-draw technical charts, clear and unambiguous to all those that view them – after the event of course. How convenient it is to offer a product that once plugged-in will turn the global financial markets into an instant cash-generator for anybody with internet access.

What people don’t realise, and often don’t want to know, is that many financial markets remain range-bound for 70 to 80% of the time meaning no discernible direction is evident and you have to actually work the “boring” markets to generate your income. The ability to spot the transition from range-bound to trending is one of the hardest to acquire and one that even experienced traders can get wrong. However, the key difference is that our elite traders, having made a loss as the market transitions, will overcome the losing trades and still make money by the end of the day. Profiting in range-bound markets requires a high level of involvement, multiple trades with small profit targets, an ability to trade counter to the prevailing short-term direction and an intuition honed through guided, repeated observation and study of price action – not plug and play solutions I admit! It also involves profiting from the naive retail traders who all to often, on any sign of the market breaching their support or resistance levels, attempt to jump-on board the new trend only to stop out as the market reverts to its previously-established range...

However, for those of us that are determined to improve our ability to spot the transition from range-bound to trending markets, here are a few technical questions for your consideration:

1. How do today’s KMMs compare to those of recent, range-bound days? (Click here for information on KMMs).
2. Is the real-time traded volume elevated and sustained as the market breaches key technical levels?
3. Does the market breach support or resistance by an atypical number of ticks?
4. Does the market struggle to find value at prices immediately below breached support or above breached resistance and move swiftly in an attempt to establish new value?
5. Are there single prints denoting strong initiative activity?
6. Is the market incapable of trading back through this area of activity?
7. Are large participants prepared to sell at lower value than before upon a breach of support or buy at higher value upon a breach of resistance?
8. Is the breached technical level rejected upon retests (i.e. does its role reverse)?
9. Is your market moving in isolation or do correlated markets exhibit similar patterns?
10. What is the time of day/schedule for economic data releases?

If you can assimilate the necessary information to answer these questions instantly, in advance of trading around a breakout, you will increase the effectiveness of your trade decisions.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education”

This entry was posted on Friday, July 2nd, 2010 at 8:06 am and is filed under Inbox Education, Technical Analysis, Trading hints, tips & tricks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.