Breakout trading from a price range is a straightforward how to trade process for swing traders because a trading range is easy to spot on a stock chart and the price breakout itself is obvious. Unfortunately, many if not most range breakouts do not work out in the trader’s favor. We look at some techniques available in Swing Master Chartist to push those odds towards the winning side.
Defining a price range only as support or resistance levels or as a consolidating chart pattern is inadequate. They occur too frequently. We use the support and resistance level of the fractal range. A fractal as that term has come to be used on stock charts is simply a five-day high or low price bar. In other words, a fractal high is a high price higher than the previous two bars and higher than the following two bars. A fractal low is the inverse. You may not think that a 5-day high or low could be meaningful but if you scan any stock or commodity or Forex chart you will see that fractals do not occur that often, and that fractals are often turning points when they do occur.
Fractal Price Range
The chart below is from the Trading Fives Oscillator Swing Trader chart. The current fractal price range is marked with the pinkish rectangle and the fractal high and low prices are displayed on the chart.
The green, red and blue moving average lines are called the Balance Lines. The basic trading rule is that you take any fractal range breakout that closes outside the fractal range and on the “right” side of the red balance line. A bullish breakout bar, for example, would have to close above the red balance line to become a valid breakout trading signal.
Cut Down on False Breakouts
These two trading filters will cut down on the number of false breakouts but, alas, nothing is perfect. The swing trader’s initial stop-loss is a close in the opposite direction of the red balance line. This breakout trading strategy will catch a trending move in its earliest stage while also providing a predefined risk of loss. The red balance line is often far enough away from the breakout price to keep you in the trade even if the stock pulls back into the fractal range, which happens an estimated 50% of the time. Novice traders often get scared out of breakout trades and take a loss only to watch the stock relaunch out of the range a bar or two later.
The fractal range breakout is an initiating trade in our breakout trading strategy. It is simple, easy, and objective and is a cornerstone of our S.E.O. Swing Trading Strategy.
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