What you'll learn
- Identify a range and its boundaries
- Trade a range's edges with stops outside it
- Judge a breakout by close, volume and retest
Recognising a range
After a trend, price often stalls and begins to bounce between two levels, each touched two or more times. Draw a line through the highs and one through the lows; if price respects both for several swings you have a range. The middle of a range is the worst place to trade, because price can go either way and the target is close in both directions.
Trading the edges
Buy near the floor with a stop below it and a target near the ceiling; sell near the ceiling with a stop above and a target near the floor. The risk-to-reward is set by the range height against the stop distance. A range that is too narrow to give at least 1:1.5 after the spread is not worth trading.
Breakouts
When price leaves the range, three questions decide whether to believe it. Did it close beyond the level on the timeframe you are trading, not just poke through? Did the move come with a surge in activity? And did price come back to test the level from the other side and hold? A breakout that answers yes to all three is worth trading; one that fails the first is a false breakout, which is itself a trade back into the range.
False breakouts
Levels attract stops. A move just beyond a range boundary triggers them, and if there is no follow-through the move reverses, trapping the breakout traders. Waiting for the close and the retest costs some of the move and avoids most of the traps.
Key takeaways
- Ranges are bounded by levels touched several times; trade the edges, not the middle.
- Breakouts are believable on a close beyond the level, with activity, and after a retest that holds.
- Most breakouts fail; the failure is a trade back into the range.
Knowledge check
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This lesson is general education, not advice. Risk disclosure.