Live Trades Series: Trading Range open, Gap Down, and Bull Breakout

 

Video duration 10min 29sec. English subtitles to follow.

Trading Range open, gap down and bull breakout

Video transcript

Introduction

I’m Al Brooks, and I want to thank you for watching this video. This is part of my Live Trades series.

Today, there’s a gap down and then a Trading Range and then a bull breakout, and I want to talk about how I traded it today.

Live trade recording

I’m going to speed up the bars up to the point that I place orders. This is also in a simulated account. I’m also trading in my personal account as well. Here in the simulated account, I’m trading just a single contract. You can see everything is moving very quickly. There’s a big gap down where the market’s far below the Moving Average, but there are several big bull bars, and traders don’t want to sell too far below the average price if we’re getting a lot of bull bars.

We have a Lower Low Double Bottom here just above the Globex low. We have a reversal up. This is something of a Wedge bull flag, three legs – one, two, three. It would be reasonable to buy above this high or the Double Bottom, or above this high. This is a Wedge bull flag from this early bull trend right here, and it’s a Higher Low Major Trend Reversal.

We’re breaking above the bear trend line here, but not closing above the Moving Average. And then here, we finally have a close above the Moving Average and above the high of the day, and it was confirmed by the follow-through bar. So now we have consecutive closes closing above the Moving Average and closing above the high of the day. That makes it likely that we’re going to go up, and therefore I’m going to buy.

Trade entry limit order filled

I placed a limit order to buy 1 tick above the high of that bar, and I just got filled. We might test back down to this high or that high or this high. We may test to 50% pullback. But the odds are we’re going to go higher, so I’m going to hold long. And what’s my goal? Well, we have a Trading Range and we have a bull breakout. The range is about half the size of an average day’s range, and therefore I expect the average day’s range to double.

And the breakout is not all that strong. We’re getting small bars and prominent tails, and therefore this is probably not going to lead to a bull trend for the remainder of the day. What’s most likely is we’ll go up for about a Measured Move and then enter another Trading Range, and therefore this rally is basically a bull leg in what will become a Trading Range. Another breakout bar. We closed on the high. We closed above the high of the prior bar.

Trade and stop management

Reasonable to hold long. You can always get out a point or two below any bull bar. You can get out a tick below a bear bar closing below its midpoint. I’m going to put a stop in below the low of that bull bar because if this is going to go up the way it should, it should not pull back below that bull bar or breakout bar.

I’m slowing this down so you can see me adjusting the stop order. I’m going to raise the stop. I can put it to a point or two below the low of the most recent bar, and we have that little bull bar. I could go below that a point or two, and that’s just about my entry price. So I’m going to raise that stop to right around my entry price – in this case, about a tick above my entry price. We’ve had a bunch of bull bars with no bear bars, and there are two ways to draw the Measured Move, here and here.

Profit targets

So those are targets. They’re about 10 points above my entry price, so there I placed a limit order to exit about 10 points above my entry price. I could’ve held and I could’ve gotten out a point or two below the low of the prior bar. For example, I could’ve gotten out a point or two below that, or I could get out 1 tick below a bear bar closing on its low. This could go up all day, but this is yesterday’s low; that’s resistance. We have two ways to draw Measured Move targets here. That’s resistance.

And normally if you have a Trading Range that’s about half of an average day’s range and then a breakout, especially a breakout that is not especially strong – we have a lot of small bars and some bars with tails – this is probably going to convert into a Trading Range. And in a Trading Range, it’s usually better to exit if you have a pretty good profit. Given the size of the bars and the size of the daily ranges, 10 points is a reasonable profit. So I bought here, I placed a limit order to get out 10 points higher, right here. It could go a lot higher, but it’s probably going to end up in a Trading Range. So that’s a reasonable place to exit.

Trending Trading Range day

A trending Trading Range day. So it’s a trend – we opened down here, we closed somewhere up here later in the day. So it’s a bull trend, but it probably is going to be made of two Trading Ranges, a Trading Range here and then a breakout and then probably a Trading Range here. Obviously, if it becomes a very strong bull trend, I can always buy again. But right now, most likely we’re going to soon evolve into a Trading Range.

And this is the end of the day. And here’s that opening Trading Range, here’s the Moving Average. A big gap down, and then we started to get a lot of bull bars. Do you really want to be selling below the average price when you have a lot of bull bars? If you’re going to be selling, you want things to be more bearish than average. You don’t want things to be bullish. One measure of average is the Moving Average.

4 concepts: TR open, then bull breakout

I want to make four points. We gapped down far below the Moving Average, and the average is a measure of the average price. It’s fine to sell far below the average price if you’re selling something that’s far more bearish than average. But look at all the bull bars with big bodies closing on their highs. That is not very bearish, and therefore traders don’t want to sell here. They’re happy to sell, but not far below the average price.

You could call this a Triangle; we have a Higher Low, another Higher Low. We have a Lower High, we have a Lower High, and this is a reversal up, and we have a slight Double Bottom Higher Low. It’s also a Wedge bull flag, three legs down – one, two, and three. Bull bar not closing on its high, but still a decent bull bar. You could buy here, you could buy here, but it’s right below the Moving Average. It could be a Double Top with this. It’s better to wait for a breakout above the Moving Average. A breakout bar here. Not very big, has a conspicuous tail. You could buy above that.

Wait for follow through

Or you could wait for the follow-through bar, the close of this bar. You can see as soon as it closed, the open of this bar is slightly above the close of that bar. A lot of traders wait for a follow-through bull bar, consecutive closes above resistance, above the Moving Average, above the earlier high of the day, the top of the Trading Range. And then we had a third bull bar. I could’ve bought here. I could’ve bought above that. I could’ve bought above this. Here we have a close above the Moving Average. I could’ve bought the close there above that. Here we have a bull follow-through bar. I could buy the market on the close of that bar or above the high of that bar.

I ended up buying above the high of this bar. At that point we had 6 consecutive bull bars. We probably are going to go up for about a Measured Move, and there’s the Measured Move target. I exited with 10 points because the odds were the market was going to soon transition into a Trading Range. It went a little bit higher, but it basically was a Trading Range for the remainder of the day. If I had not exited here, I would’ve exited below that bear bar.

Expect Trading Range to approximately double

The second point I want to make is that the early Trading Range on the open was about half the height of an average day’s range. You’d expect the day to have a range that would be about average, and therefore you’d expect the range to double. It could double by going down; it could double by going up. It could double by going up a little, down a little. But chances are, once we’ve had a breakout with follow-through, we’re going to go for about a Measured Move up.

Wait for consecutive closes above EMA

I said you could’ve bought here, you could’ve bought here, here, here. The breakout and follow-through you could buy at any point in here. Waiting for consecutive closes above the Moving Average and above the lower Trading Range gives you an increased probability of making a profit, increased chance of the market going up for a Measured Move. But it also reduces your risk/reward because buying here, there’s less reward compared to buying here, and the risk is bigger.

Theoretically, you might put a stop below this or below that, so you have worse risk/reward. That’s always the case whenever you do something to increase your probability. You cannot have both high probability and great risk/reward. There has to be a reason for an institution to take the other side of the trade.

Taking profits

Finally, it’s reasonable to take profits around the Measured Move. Traders often take profits at 4 points, 5 points, 10 points, 20 points. I did not think we would make 20 points, but I thought we had a good chance of making 10 because the Measured Move was a little bit higher. It’s better to take profits once you’ve had a reasonably good profit if you think the market’s entering a Trading Range, because it’s possible that this was going to be the high of the day, and we could’ve traded down, and you would’ve ended up giving back all of your profit. Here we have a reasonable profit. You’re near a Measured Move based upon the lower range. It may go a little bit higher, but it’s probably going to soon evolve into a Trading Range.

Close

I’m Al Brooks, and I want to thank you for watching this video. I hope that you found it helpful.

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