Range Trading

[smwinc]

	Quote:	james_gsx
	I would have to agree with Brownsfan, when you are day trading then most of it is range bound in some way. There are various ways to trade this but most people don't even have a clue how to do it. I would agree that you should know who trades your market, when they are trading, and basically figure out what the big institutions. But the fact is most people can't even afford the draw down those major institutions can. Why trade like a bank when you have a $100,000 account? If I ran a large fund I would understand and my trading plan would be different. In fact I would definitely want to use quants for part of my business. But if my style of trading consists of trades lasting less than two minutes then I don't really care about what the major banks are doing. I'm more concerned with "reading the tape" and knowing the path of least resistance. If the banks come in and make a big move, chances are I will see it and go along for the ride. I don't care if it's Brownsfan with his money making the move or Goldman Sachs, if the trade fits my plan then I better be in it regardless. Also most smaller traders don't have the knowledge, time, or capital to do quant trading to an extent any bank or fund does (let alone even understand the math behind it). I'll let them write their quants and I'll stick to my 1ES point trades. Let's look at Friday for example, I would call this a choppy day. We did close up (70 pts I think?) but the simple fact is no one has a trading plan that says buy at the open and sell at the close and actually makes money. If you traded a simple moving average crossover you would have probably 3 good trades and the rest you would have been stopped out. But if you have a plan set up for range bound trading, as you can see in the chart, you would have walked away with a lot more money while the guy trying to find the trend is losing his shirt. So the questions still stick around, how do you trade the range? Do you buy at support? Well how do you know it's even going to hold, and what is a realistic target? What happens if that support or resistance line breaks, do we switch to a trending setup? Even then, how do we know it's a trend and not a false breakout? Sorry smwinc if it seemed like I was discounting what you were saying, I wasn't. I'm just saying for a small trader like myself with a very small time frame I think knowing how to trade rangebound vs trend is very important. When I swing trade, that's completely different.

I apologise, perhaps my point wasn't clear.

When you talk about a market range trading, or trending, it doesn't make sense unless we give a little more imformation. I'm not trying to be picky or pull on little details here- it completely depends on your trading timeframe.

If you execute typically off a 1 minute timeframe / 5 minute anchor you can be trading the (intraday) trend, while the guy next to you is trading off a 60minute, trading the same market as a box ('range') play.

Some people will see the chart you mentioned above as a range bound day.

Others may sell the open, cover at lunch and "count" it as a trending day.

On their own, 'range' and 'trending' don't give enough information.

We all have completely different trading styles, and view things differently. As an example, I'm generally quite short-term in the DAX. This morning I made 142 round-turns in the DAX futures. That's not good or bad, it's just my method, and my way of seeing things.

The point I was trying to make about about some of the strategies institutions use, is that (I think) it's important to remember (and apply it when necessary) that the logic and reasoning for why many enter and exit trades, may often work and produce profits, but for 'many' methods, its not a cause and effect.

I.e. If your strategy is:
Sell when x line crosses over y line, it might work great, but no ones going to argue the 'crossing of the lines' caused price to move in your direction.
Or
Sell when "supply" (however you measure it) exceeds "demand (again, however you measure it), this is arguably a much more X causes Y relationship. Price really WILL move down if your analysis is true, if supply really does overtake demand.

Why do fading range breakouts often make a good trade? Some might say: Because Average Joe puts his stop above/below prior highs/lows, Smart money moves the market enough to hit the stops, get that inflow of liquidity to close out their current positions, and reverse the market.

Just because fading a range 'often' works, everyone knows of times when we DON'T want to do that.

It's about just remembering the logic behind why your strategy works, and knowing when it doesn't apply.

Big institutions aren't anything special - they are just focusing on volume and liquidity, just as many other individuals like you and me are doing.

The example I gave about them front running another bank, is exactly what many people do when listening to Pit Audio. You hear Goldman is buying, so naturally you join them, and ride the trade. That information and understanding is an edge - if your strategy is an MA cross-over, it might not know yet that Goldman is standing in the big S&P Pit trying to buy.

Often the 'best' trades are when the market does something different. We all have bread and butter trades in whatever method we trade in, but (in my opinion) having the understanding to be dynamic, to notice when the standard things don't apply and adapt, can not only save you getting your head ripped off, but also give you those 'big fish' trades.

SMW