Often, one of the first trading scenarios and potential trade setups that a trader is introduced to is the range breakout. This is possibly because a range is easy to spot and knowing when to enter is relatively easy – when the price moves outside the range. There are likely many reasons people trade range breakouts. One may be the belief that range breakouts can provide extraordinary returns as the tradable is launched out of its holding pattern. Regardless of the reason, trading range breakouts is an unprofitable endeavor for most novice traders, and this article will explain three reasons why. Two alternative strategies will also be looked at.
False Breakouts
The first reason is that by the very nature of a range it is likely to have multiple false breakouts. A false breakout is when price moves beyond the previously established price range, but then retreats back to within the previous price range. Since a range is a contained battle between buyers and sellers both pushing in opposite directions, these false breakouts often occur because support and resistance are not 100% accurate. While filters can be added to reduce the number of false breakouts that are traded, these losing trades cut into profits which are made by trading a legitimate breakout.
The first reason is that by the very nature of a range it is likely to have multiple false breakouts. A false breakout is when price moves beyond the previously established price range, but then retreats back to within the previous price range. Since a range is a contained battle between buyers and sellers both pushing in opposite directions, these false breakouts often occur because support and resistance are not 100% accurate. While filters can be added to reduce the number of false breakouts that are traded, these losing trades cut into profits which are made by trading a legitimate breakout.
If correction and consolidation well supported on the green line as above , should consider the best entry price .
Set the CL point when the price move below the green line . Always trade during the consolidation and during the consolidation and supporting line to have more up side and small cut lost points . Trading plan is important when investment .
Corrections to Breakout Point
While the false breakouts cut into profits made on legitimate breakouts, a further problem often arises. The following scenario is typical: a trader is elated to see paper profits mount as price moves out of the range and they are certain it is a legitimate breakout, only to see the price retreat back to their entry price (just outside the range). Often this price action results in the trader taking a very small profit or another small loss because they now feel this is likely to be another false breakout. The price corrects, moving back to the range breakout point, and then takes off again in the breakout direction. The trader watches in frustration at having gotten out of the trade on the correction only to see that it was in fact a breakout. Roughly half of breakouts that occur from trading ranges retrace back to the breakout point before continuing in the original breakout direction. Combine this by the high rate of false breakouts and most novice traders lose money on the gyrations and end up missing the big move when it occurs.
Explosions are Rare
"The big move" brings us to the next problem – large moves are rare, given the number of potential ranges to trade. Like picking a winning ticket out a drum of potentially hundreds of participants, explosive gains do not happen as much as the novice trader thinks. While range breakout examples are often used to show a stock or commodity breaking out and making a large percentage sprint, this is not always the case. With potentially hundreds of ranges being traded in different instruments in markets around the world, what is the likelihood of picking the few that will eventually explode? The probability is not high, but yet it is the dream of breakout traders to have that trade and ride it out for a fabulous gain. As we have just found out, this is rare, and given the other two problems with ranges, the trader is often not even in the trade when that move finally does occur.
Source from : http://www.investopedia.com/
Explosions are Rare
"The big move" brings us to the next problem – large moves are rare, given the number of potential ranges to trade. Like picking a winning ticket out a drum of potentially hundreds of participants, explosive gains do not happen as much as the novice trader thinks. While range breakout examples are often used to show a stock or commodity breaking out and making a large percentage sprint, this is not always the case. With potentially hundreds of ranges being traded in different instruments in markets around the world, what is the likelihood of picking the few that will eventually explode? The probability is not high, but yet it is the dream of breakout traders to have that trade and ride it out for a fabulous gain. As we have just found out, this is rare, and given the other two problems with ranges, the trader is often not even in the trade when that move finally does occur.
Source from : http://www.investopedia.com/
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