Trading With Daily Range Breakouts

Ken Calhoun |

Looking for trading entries with the help of daily trading range patterns can help savvy traders spot volatile moves for potential trading opportunities. The concept of “Average True Ranges” (ATR) has always been popular, and the usage of daily trading ranges for fine tuning swing and intraday trading setups can assist traders in identifying chart patterns worth trading.

Daily Trading Ranges: Wide versus Regular Range Patterns

Using a fifteen-day, fifteen-minute candlestick chart for swing trading stocks can be valuable when traders know how to spot wide vs. regular-range breakout patterns. In Figure 1 [Netflix (NFLX)], it can be seen that the average daily trading range, as measured from the high to the low, is about four points on a regular trading day. What traders should look for, is volatility on high volume during days in which the trading range exceeds the average trading range, for subsequent breakouts.

Figure1 Netflix NFLX(Click to enlarge)

For example, in Figure 2 (NFLX), a wide-range day occurred on May 11, 2012, with a range of (78 – 72) = 6 points, which is a 50% wider trading range than usual. This is the first indication that potential institutional accumulation is occurring, so traders can keep this chart on the watchlist for potential breakouts (or breakdowns), following this wide-range day.

Figure2 Netflix NFLX(Click to enlarge)

Typically it’s a good idea to follow a swing trading chart for 3 to 5 days following a wide-range high volume day, for potential entries in either direction outside the current consolidation region. The main thing to visually scan for is those exceptional wide-range days (at least 30% wider than usual) on higher volume, as a precedent for upcoming volatility.

How to Manage Trading Entries Using Wide-Range Patterns

Developing the visual pattern recognition skills to identify wide-range versus regular-range trading days can be helpful in making trade management decisions as well. For example, if a trader had bought an initial position at just over $75 in Figure 2, on a cup breakout, the subsequent wide-range day would be an ideal time to add to a winning open long position.

If a trader has not yet entered position and yet sees a wide-range day, then it’s an excellent time to keep the chart on the “watchlist” to potentially enter on new high breakout continuations. Adding into a winning position that continues up past a wide-range day is also a useful strategy for scaling in to a successful trade.

Conversely, if on a swing trading chart the price action starts to decrease significantly narrower than a regular daily trading range pattern, for example on May 15th, in which the trading range is just (79 – 77) = 2 points, then that is a signal that volatility is decreasing, and a tight trailing stop should be used.

Comparing Relative Trading Ranges and Making Decisions

Traders often struggle with uncertainty in their trading decisions, second-guessing their entries and exits. By comparing the daily ranges on a swing trading chart against each other (to see regular vs wide-range days), traders can easily spot whether or not volatility is increasing or decreasing.

Whenever trading ranges start to widen, especially on higher volume, then that’s a technical signal that the instrument is worth considering for potential trading opportunities, since new volume and volatility is driving price action. Good traders are primarily focused on price and volume; and when one or more of these start to expand beyond usual ranges, then a trading signal is generated, which makes sense for traders to take action on.

Developing the skill to quickly spot “what’s the trading range done, lately?” on a day-by-day basis can help traders determine whether or not a trade is worth taking, and in which direction. These daily range comparisons provide another tool for active traders to use in potentially navigating successful swing trading entries and exits.

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus and is the founder of DaytradingUniversity.com, a popular online educational site for active traders.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
MDAS MedAssets Inc. n/a n/a n/a 0
NFLX Netflix Inc. 97.48 0.41 0.42 7,235,109

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