Thursday, July 16, 2009

Three Questions to Ask in a Trading Range

When trading in a range, one of the most decisions that a trader must make is whether the range will persist or whether we will sustain a breakout from the range.

Here are a few things worth looking at:

1) As the range trade proceeds, is volume (especially relative volume) tailing off or picking up. With volume correlating with volatility and also reflecting the participation of large market-moving traders, the odds of breakout increase with growing volume. As markets slow, they tend to become more range bound;

2) As we make multiple attempts at new price highs or lows, do we see more stocks and sectors participating in those efforts, or does each thrust up or down carry fewer issues with it? This is one area where I've found monitoring the basket of 40 stocks to be especially helpful;

3) As the market makes successive attempts at new price highs or lows, do we see sentiment expanding in the direction of trade--NYSE TICK, volume at offer vs. bid--or do we see sentiment drying up?

Comparing how we're trading from bar to bar and observing how the trade proceeds within the bar (where volume expands and dries up) can give us important clues to ranges that will remain range bound and those that will ultimately morph into trends.

For more on the range topic, see this post.