Trading Ranges
Big Moves Occur Outside of the Range
A trading range is basically a horizontal channel in which a security moves
from the high and low of the channel for an extended amount of time.
Obviously, the upper level of the range can be considered resistance and the
lower level represents support. Trading within a range is possible, but it's
the breakout from the range that provides the best opportunities.
When price breaks out of
the trading range, a continued move in the direction of the breakout can be
expected. Some breakouts are stronger than others, and one way to identify a
stronger breakout is to look at the duration in which the security has been
in the range. Normally, the longer the trading range has been in effect, the stronger
the move when the range is violated.
Our first chart shows
that MM traded in a range for 3 months, but when price fell through this
range, it continued to drop for the next 3 months. The second chart shows
another good short opportunity as BDK traded in an extended range for almost
half a year and then moved steadily downward once the support level of the
range was sufficiently penetrated. Our third chart, IBM, gives a great
example of a stock really taking off once it had exceeded the resistance level
of a narrow range.
Like consolidations,
trading ranges also offer built in trade management as the penetrated support
or resistance level gives you an excellent place to place your initial stop.
As with any chart pattern, additional chart confirmation on the breakout will
help increase your odds of entering a winning trade.
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MMM falls over 20
points after breaking out of its range.
BDK honored the
ranges support level as resistance after the breakout.
IBM shows huge gains
after breaking its range to the upside.
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