Trading range days special
BPA trading room Q&A: February 18, 2016
An Ask Al special on trading range days price action with five questions at end of trading room webinar all being 100% relevant to topic.
See below video for all questions and transcript.
Video duration: 11min 45sec
Video transcript — Trading range days
Making money on trading range days
Question: Why would you assume that Bar 49, that we would have to test back to the 47 low? [Okay, Bar 49, that we would have to test back to the 47 low.] Even though we already had a micro double bottom?
Okay. Because it’s a trading range day, so I don’t remember what I said, but in a trading range day I’m assuming that every breakout is going to get reversed, right? And that you can pretty much buy with impunity below anything, use a wide stop to scale in and make money. And you can pretty much sell above anything all day long and make money. That’s what I’m saying: A day like this, you say, “Oh Al, it rallied 10 points. Al, it rallied 10 points in a small pullback bull trend.” It doesn’t matter — trading range day. As long as you understand that and you trade it well, you can make money.
Sometimes in a trading range day, you can set up like this: A reasonable buy, high or low major trend reversal, Bar 48, right? And then you get a plunge — sometimes four or five bars — and you’re thinking, “Oh, my gosh, I’m getting killed. This is going to be a big bear trend day.” It’s not. As soon as you get a bull reversal, 53, you buy it because you’re going to come back up here. Probably 70 percent chance.
It takes a while to believe all this stuff that I’m saying, but if you look at days like this, you start to see a lot of trading range price action. And then it’s selling off and there’s something wrong with the selloff — you’re getting these big bounces all the way down — it looks like it’s probably going to end up as a trading range day, in which case it’s going to be a very forgiving day. And the key is staying patient, and confident, and comfortable, and not getting scared by the big moves. It’s confident that it’s a trading range day. It’s going to keep reversing, and big legs, as strong as they are, they’re not going to go all that far.
Fading measured move targets
Question: Do you think fading most logical, measured move targets is usually good enough for a one-point scalp, realizing that nothing’s 100 percent and it depends on context?
Context is everything, right? So you can see today I have several measured move targets drawn in. So It fell here, rallied, went up here, sold off, fell here, bounced, bounced over here, and there are other ones that I’ve erased. I don’t think measured move targets are any better or worse than any other kind of support or resistance, prior highs and lows, trend lines, channels. It doesn’t really matter. In general, if the context is good, fading a test of support and resistance, that’s usually a good thing. But if the context is good for a breakout — let’s say you’re in a strong bear trend and you see a measured move down, I think you’re making a mistake buying with a limit order at that measured move down.
Because if you look at a bear trend day and you start at the first bar and don’t look at all the other bars to the right, hide them, and you start scrolling forward, you’ll start to see all kinds of measured move targets, and wedge bottoms, and all kinds of reasons to buy. But as long as you understand that, “Hey, this is a bear trend; we’re getting gaps to the downside, the pullbacks are small”, do not buy. So you have to assume all that support that you’re seeing as the market’s going down, it’s all going to fail.
So when the market’s in a trend day, you have to assume 80 percent of bottoms — 80 percent of reversals will fail, right? When it’s in a trading range, you have to assume 80 percent of breakouts will fail. So we’re trying to breakout — it’s a trading range day. We’re trying to breakout — it’s a trading range day. Breakout, breakout, trading range day.
So for me, I would not just routinely fade every support or resistance level. I’m much more eager to do it when there’s a lot of trading range price action, or in climaxes. As you know, a lot of times I’ll fade very strong moves in climaxes.
Think limit-order scalping — for me that is!
Question: You bought one point below Bar 27. For a scalp, you said you would not hold for a swing. Can you briefly explain when you would hold for a swing when taking this type of trade?
Yeah. In general, when I think the day’s a trading range day, I’m just thinking scalp. My mind just goes to scalp limit orders. That’s how I trade, right? If you look at this day, there probably were 40 or more one-point scalps, and I don’t take all of them, but I take a lot of them. So is there a better way to trade it? There might be, depending on the personality, but I can make a lot of points on a day like today with a very high winning percentage. So there might be a better way that will suit somebody else’s personality, but I’m comfortable with what I’m doing. I’m happy, and I’m relaxed as I trade, and what more can we expect out of a job, right? You’re happy; you’re making money; and you like what you’re doing.
So I understand that there are all kinds of ways to trade and some ways are better than others, especially in hindsight. All I care about is whether or not what I do makes sense. That’s all I care about. There are always many logical ways to make money, and at the end of the day you can see which way was the best. I don’t worry about that. I just worry about “Did I do something that makes sense? Am I doing something that makes sense? Am I managing my trade correctly? Is what I’m doing logical?” That’s all I care about. And I trust that if I do, I’m going to make money.
So in a trading range day, in a day where there’s a lot of trading range price action and the breakouts just keep messing up, right — if there’s something wrong with every breakout and every reversal, like all through here and then here, right, that big tail and then this reversal — to me, it’s just reinforcing my belief that this is a trading range day and that it will probably continue all day long. So with that in mind, I’m doing a lot of one-point scalps, some two-point scalps, and a lot of limit order trading that I’m willing to scale in.
Breakeven instead of profit and holding onto losers
Question: I have a problem getting out at breakeven on most of my trades that are profitable and holding onto losers. Today, I broke even on selling 2 high and selling below 37. Can you comment on that?
Yeah. I think in part it’s what I said several times today, or at least I alluded to it several times. That in a trading range day the market is always trying to get you to believe it’s becoming a trend day and it makes traders think, “Okay, maybe if I hold, this will be it. This will be the one that is a 10-point winner or a 20-point winner,” but the reality is it’s not going to be. The reality is all day long, as I said, there were probably 40 trades today — 40 limit order trades betting that breakouts would fail, so the odds are just overwhelming that if you’re holding onto a trade looking for a swing on a day like today, it’s hard. Maybe you sell below 36 and hold for a swing. It’s hard to hold short when you’re forming a Higher Low Major Trend Reversal and a wedge bottom. It’s just hard. So for me, I’d rather just scalp, scalp, scalp, limit order, limit order, limit order. So once I decide that the day is getting a lot of trading range price action, I just scalp, scalp, scalp, and if suddenly — let’s say we had Bar 30. Let’s say 31 was another big bull bar closing on its high. I’d say, “Oh, look at that. It’s no longer a trading range day. It looks like it’s becoming a trend day,” then I might swing part. But until I’m hit over the head with a board, I’m going to just keep being stupid. It’s a trading range day. It’s a trading range day. I’m going to scalp. I’m going to scalp. Right?
So until I’m clearly wrong, then that’s what I’m going to keep doing. So if you sold the 2 high, you had two points, I’d take the two points. The 2 high at that point, you possibly could swing, but then when you see the doji bar and then the bull bar here — 4 — I think you’re going to be trying to get out. And selling over here on 36 low, to me, if I got one or two points I would bet on a trading range, which we had, I would just take the one or two points. For me, I’m more selling above bars. You know, selling above 31 or maybe selling above 34, scaling in higher selling more at the 31 high.
Trading range versus trend day
Question: I sold the close of 33, the third consecutive bear bar, with a stop above the 12 high, [that makes sense.] betting on a test of the 23 close. [Okay, that might be a little bit aggressive, right? If this was straight down with no test, we already had a double bottom here, so I think there’s less need for this to get tested, although it ultimately did. Okay?] I ended up reversing to long above 43, and took a loss on 47.
Okay. So he sold the third bear bar here, okay, and he held through this, and that’s okay, keeping a stop above 12. That’s okay. So he sold that third close, and he ended up reversing to long above 43, and getting out down here. Again, that’s the issue of what I’m saying about trading range day versus trend day. So yes, we had several good swings today. We had a swing from the open down to here, and up, and then down, and up and down. And if you entered exactly right or if you entered early and used a very wide stop, you could make a lot of money.
But to me, it’s just too upsetting to do that because I’m always getting torn up inside. “Hey, I sold the market, it’s going up instead of down.” Or, “I bought – argh it’s going down instead of up.” So I’d rather just take high probability limit order scalps and just do that all day long. So you’re selling below — selling this third close. But at the time — I don’t know if you were in the room at the time, I said the breakout 30 was strong enough so that we’d probably get at least a little bit more up and there probably would be buyers below. And 34 might be a breakout test of the 27 high. So had I sold the 33 close, which I did not — I was buying there — I would have exited above 34. And then over here, this is a tight trading range, so I’m not going to buy above 43 betting that we’re going to get the bull breakout. I would wait to see a very strong bull breakout and then buy. So — also 30, I thought we’d have one more leg up. Well, 36 might be that one more leg up. I understand that this could be a wedge, Higher Low Major Trend Reversal, but it’s also a tight trading range in the middle of a trading range day, and I don’t want to be entering with stops above anything. But that’s my thought.
So the message I’m trying to communicate today is: When you see a lot of trading range price action, that’s the old duck — it walks like a duck and sounds like a duck, it’s probably a duck, right? When you see a lot of trading range price action, it’s probably a trading range. And when there’s a trading range, I automatically start thinking limit order, scalp, limit order, scalp, buy low, buy more lower, sell high, sell more higher, and scalp, scalp, scalp, scalp, scalp. Right? And instead, “Aarr… look at that strong bar, Bar 30. I bet that’s the start of a bull trend. Or look at this strong rally up here — I bet it’s the start of a bull trend. Look at that bear breakout; maybe it’s a bear trend.”
Until I’m clearly wrong, I’m going to assume I’m right on a trading range day. But this is, I think, a really good example of a trading range day. Lots of big swings and limit order scalpers, if they manage their trades correctly, collected a lot of points today.
Okay, I hope everybody has a good night.