Trading Pal Blog

Markets can move in three directions: up down and sideways. It is the sideways bit that causes us the most grief. Let me explain.

A typical entry point is the breakout. An index, stock or commodity has been trading in a range between a support level and a resistance level. With an uncanny repetition it will retest those levels just to make sure they are holding - so goes the theory. What you do not see as an ordinary trader but what brokers and market makers can see is the congregation of stop orders neatly packed below the support level and above the resistance level.

So here is the tug of war. Someone will try to thump the game by causing the market to drop just enough to hit all those stops. They are sellers. They all assume that if the support level is broken it is a bearish omen and they all want to go short. The thumper of course had just enough weight to penetrate the support level but not much further. He is buying low from all those bears. Meanwhile the market pendulum swings and all the bears cover their shorts having lost hope in a downward trend. This buying pressure pushes the price further up and the thumper sells at a nice profit.

With a CFD platform you are clueless as to what goes on because you do not have a course of trade to see what's coming up on the wings. You do not have a volume indicator so you do not know if a move is sustainable with large transactions taking place. The solution would be a contrarian trap. Say the market currently trades at 4750 - the middle of its range. Place a limit buy order at 4730 and a stop sell at 4720 if it doesn't reverse around there. Place another limit sell at 4770 and a stop buy above at 4780 if it breaks out. The two buy orders at 4730 and 4780 cancel each other. So do the two sell orders at 4720 and 4770.

This system will harvest the 40 points oscillation between 4730 and 4770 whether up or down and will take you out with a 10 points loss if a breakout was to occur.

Nifty, huh? So how often does your market range as opposed to how often does it trend? People would say it would trend 30% of the time. Do they publish in the newspapers whether tomorrow will be a trending or ranging day? You hope! But statistically if it ranges 70% of the time and you make 40 points and trends 30% of the time and you lose 10 points - then this is a profitable system.

Worth checking it out, don't you think? It's always good to check the temperature of the pool before you jump in to swim. I hope this article prompts you to unravel patterns in the market you are trading.

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