Friday, April 09, 2010

Notes on Trading a Range Market

We've seen some decent moves this morning, but note the importance of catching day structure early in the session. By making the call of range day, we are prepared to fade moves away from the day's volume-weighted average price. We can also then focus on how markets trade above and below VWAP to handicap the odds of a breakout from the trading range.

As a rough rule, I look for the amplitudes of moves above and below VWAP in a range market to be similar: If we trade two points above VWAP before retreating, I'll look for a reversal move to travel two points below VWAP. Focusing on that rule can be helpful in identifying range extensions that become range breakouts.