Picking the top in a trading range is one of those setups that every trader has tried at some point in their career. It always goes something like “If I can short it at 100 and cover at 80 I’m going to retire in a week and my risk is only a dollar so it fits the risk/reward that the pros are doing. It’s a sure thing”
The thing about trading is it’s never a sure thing. Everything can fail. Even if your risk/reward is strong, if the edge is weak, it still may be the wrong setup to take. Yes, the pros look for high rewards vs risk, but they also make sure there is an edge present. You can bet a million dollars on 11 in roulette and make $30 million, but that doesn’t mean you should.
Traders see a setup that looks over extended and decide the payout is so strong they can be wrong half the time and still come out ahead, so they take the shot.
Then, the strength keeps going, taking them out along the way, and they see another opportunity just a little higher up, and they take it again.
Taken out a second time, they are now down 2R but see an excellent opportunity to try again and get back everything they’ve lost plus a little more. Taking it here requires a 2:1 payout just to get back to even minus spreads and commissions, but the reward is still easily 10:1 so it’s worth the risk, they take shot #3 and lose.
By this point they are so fed up with the stock that they move on in disgust, refusing to even look at this symbol anymore.
Just when the trader ran out of money to fade, the stock starts to turn. The trader, already staring again at the stock and breaking their own vow they had just made, now sits in total disgust as the trade goes 3R in their direction while they ran out of money to trade.
Their plan said 3 shots and done for the day, yet if they only would have taken that 4th shot they would have gotten everything back and then some.
Next time, they won’t follow their plan so much because it was the wrong call. Next time, they will crush it. Next time, eventually becomes the last time, if there is no trading edge. They will continually blame other parts of their own plan until eventually they simply stop following any plan and blow up. Edge plus Positive Reward to Risk equals success long term. Everything else is just a trader trying to outsmart everyone else and hoping they aren’t the dumb money at the table.
By using a 20 period range high/low break. This indicator is completely free on most trading platforms. All it does it take the highest high and lowest low of the last 20 bars (not counting the current bar) and plots it.
This forms a range that can be extremely helpful if used properly. This is not a catch all by any means, but it is an excellent question to ask yourself before taking a trade.
It works as a fade, which was discussed above and will be discussed in the video that follows, it works as a trailing stop, and it also works as a continuation indicator.
The key to all potential CTP Hacks is this–it should be used correctly, as quickly and efficiently as possible, and is only used to help strengthen your own plan.
Let’s take a look at it as a continuation indicator.
This was NVDA on 9-25-17. Notice it is simply a 2 and 5 minute chart. No daily, no ticks, no mid term strength. Simply looking at the immediate trend with a 20 period range (white lines above and below price on the 2 minute).
When price runs back up to the 50ema on the 2 minute, the 20 range high is still dropping. When the 2 minute stalls out just below the 20 range high, it shows you this is an excellent shorting opportunity.
For those that wish to buy NVDA because it’s over extended to the downside and at a rising daily 20sma, it should also show you that not even the 2 minute chart agrees with you yet.
That does not happen until near 12pm when a new 20 range high is made for the first time all day.
This does not guarantee a winning long trade by any means of the imagination, but it does show you how to look at the trade differently. If you want to buy it long, what timeframes agree with you? If you don’t have any, how strong is the edge?
The video should help explain this even further. In closing, just remember that everything works and everything fails. The key to success is not trying to avoid all losing setups, but to look for patterns in your losses and look to adjust those patterns to a different way.
Hopefully this helped your trading style. Feel free to comment below and let us know what style you like to trade, and if you have noticed a 20 range break as being helpful or not in any of your past wins or losses. Don’t forget to pass this forward and share it with anyone looking for some help in trading, and until next time, remember to trade your own plan.
Ben from CTP