The goal of this article is to explain how ranges can be traded. Contrary to the previous post on ranges (click here), which discussed all the important theoretical parts; today’s session is more of a hands-on and practical approach.
A consolidation (which is another name of a range) virtually takes place on all time frames. However, the lower time frames offer a lot less potential space than higher time frames.
For instance, a range on the one-minute chart has top and bottoms levels which are very close to each other, thus creating an extremely tight range environment. Obviously, a daily chart will have more pips between its stop and bottom. When a trader then zooms in to lower time frames, they can usually find good opportunities in riding on several momentum tides up and down.
STEP 1: IDENTIFYING RANGE
The very first step is identifying a range. Although no trader can complete this exercise correctly in all cases, it is vital to setup rules and guidelines that steer the trader in implementing their trading plan. Support and resistance (S&R) is a crucial component of any trading plan that is geared towards ranges. For more information on identifying ranges, please take the time to read these two articles:
A trader who has access to our Double Trend Trap (DTT) trading tools can use the DTT trend indicator to their advantage. This might come as a surprise, isn’t the tool meant for trends?
Yes, although the tool is actually built and designed to recognize and define whether a trend is taking place, the DTT can in a way also be utilized to measure when there is a lack of a trend. When there is no trend in play, there could be a decent probability that a range is taking place. The other scenario is, of course, the fact that a reversal could be taking place.
STEP 2: TRADING THE BOUNCE
The first and earliest method of trading a consolidation is by trading the bounce at support and resistance (S&R). However, that could lead to unnecessary risks as the trader attempts to catch a reversal spot against prevailing momentum. The problem is simple: momentum can drive price further than anyone can imagine and it is not inconceivable to see stop losses having a hard time.
Is there a solution?
Yes! Wait for confirmation. One of the confirmations a trader can use is candlestick and candlestick patterns. The advantage of candlesticks is the fact that they are pure price-action signals and have no lag.
The price is clearly bouncing off of a confluence of support (above image). The support levels were a combination of a -27.2% Fibonacci target and the bottom of a daily and 4-hour chart range. Let us zoom into price to see how it looks.
Obviously, this particular 1-hour candle would usually not have the same impact, if it were not so close to a confluence of major higher time frame support.
Considering the context, this hourly candle is the expected signal which is showing a bounce at support. Or, in other words, this is the trigger that could act as a reversal of the prevailing downside momentum up to that point.
STEP 3: ENTRY & STOP LOSS
As in most cases, there are multiple entry possibilities for such a setup. One of them could be a simple enter upon candle close of the rejection wick. The other could be a break of the candle high (of the rejection candle). A third option would be to wait for a next candle to close above the candle high (of the rejection candle).
The stop loss is in this case could be placed below or above the rejection candle. In any long trades, the stop loss would be below the candle bottom. In any short trades, the stop loss would be above the candle top.
STEP 4: TRADE MANAGEMENT
The trade management can be handled in various ways. Traders can opt for a hard take profit and/or via a trail stop loss. Considering the fact that the daily chart is showing wide open spaces back to the top, it makes sense to use a trailing stop loss with a hard take profit target at the top of the daily range – just in case price gets there quickly.
1) A tight stop loss trade management would dictate to trail stop loss each candle bottom.
a. In that case a gain of 50 pips was booked (versus 37 pips risk). This is assuming an entry upon the close of the rejection wick with a stop loss below the candle itself.
2) A looser stop loss trade management would dictate to trail stop loss each candle bottom.
a. In that case a gain of 60 pips was booked (versus 37 pips risk). Assuming an entry upon the close of the rejection wick with a stop loss below the candle itself.
Have you ever attempted to trade ranges?
How is your experience with trading candlestick patterns?
Have you ever tried combining them into one trading plan?
As shown above, candlestick patterns become a lot more valuable if they are combined with trading areas of confluence. Let us know your opinion down below!
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Wishing you a good day and Happy Trading too!
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