Friday, March 19, 2010

Trading Setups: The Failed Breakout Trade

I trade a limited number of patterns.

The transition pattern is a favorite; that's a reversal pattern. Another favorite are breakout trades: when stocks trade in a range and then establish value higher or lower on solid institutional participation. Still another favorite are "fade the range" trades: opportunities to play for a move back to VWAP when stocks can't sustain buying or selling at the top or bottom of a range and move back toward previously established value. Yet another setup is the failed breakout trade, which we see above.

The ES futures moved toward bull highs, but we did not see good early participation from the Russell 2000 Index, the broad list of stocks overall, or the NYSE TICK. That led to a prompt move back to the most recent range. Not long after, we actually broke through that range to the downside.

Much of short-term trading success is recognizing these patterns as they set up. Much of finding opportunity is recognizing that they set up across multiple time frames.