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Markets are either trending or in a trading range marking time until the next trend. It follows, then, that a potential trading concept is to identify the trading range and wait for the new trend to start. Here's one method for identifying a trading range and the results of trading the breakout.

by Alex Saitta

As technicians, we've all been told numerous times to go with the breakout. But how many of us ever really think about the logic behind range breakouts and why breakouts are usually followed by prolonged trends?

Familiarity with this logic is critical when the validity of this concept is being tested and a range breakout trading strategy is being developed.

Think about what's occurring inside a tight and narrow trading range†; in it, bulls and bears of equal number and strength slug it out for control of the market. As time passes, intensity builds as more bulls and bears enter the market, placing their bets. Suddenly, there is a drastic change of psychology and the market begins to move in one decisive direction. At that moment, the players on the wrong side of the trend run for the exit. The other traders, realizing they are on the right side of the trend, begin to add to their winning positions. With that, the market begins a prolonged trend.

Given that example, here's the next question a bond technician might ask: Has that logic been confirmed in the bond market? When Treasury bond futures have been in a tight, narrow and lengthy price range and a drastic change of psychology causes the market to begin to move one way, does a prolonged and profitable trend usually follow?

Stocks & Commodities