A sideways trading range occurs when there is no compelling news in the market. The range between the support and resistance lines actually shows the underlying market noise (volatility) caused by normal trading in and out of that stock or futures contract.
When prices move out of a sideways range, there must be news, or anticipation of news, to cause enough buying or selling to drive prices to a new level. This might be expectations of higher earnings, a possible acquisition, lower interest rates, or pending bad weather for crops.
A breakout of horizontal support or resistance will work successfully using daily closing prices (a conservative choice), daily highs and lows (an active choice), or even intraday prices (an aggressive choice). The risk of the trade is always measured by the distance between the support and resistance lines. This varies with the volatility of prices. Breakout systems are extremely popular because they:
• Are highly reliable even though they have high risk.
• Do not have a lag because signals come at the moment of breakout.
• Allow prices to move freely within the support-resistance band, imposing few restrictions.
Which Is Better, Using the Trendline or Breakout?
The breakout is more dependable because it recognizes an obvious change in the market at the time it occurs. The trendline shows the direction of prices based on their rate of increase or decrease. The breakout usually corresponds to a special event.
The breakout is reliable, partly because it has more risk. Remember that price moves are fickle. Prices may move up, but they do it in a very erratic way. It’s best to give prices room to flop around. Prices may break out of the trading range, make a new high, and then fall back into the sideways pattern for a while. The only thing we really know is that if we bought on a new high and prices then make a new low, something is wrong. Prices shouldn’t make a new low after making a new high. There is good, simple logic in a breakout system.
When prices move out of a sideways range, there must be news, or anticipation of news, to cause enough buying or selling to drive prices to a new level. This might be expectations of higher earnings, a possible acquisition, lower interest rates, or pending bad weather for crops.
A breakout of horizontal support or resistance will work successfully using daily closing prices (a conservative choice), daily highs and lows (an active choice), or even intraday prices (an aggressive choice). The risk of the trade is always measured by the distance between the support and resistance lines. This varies with the volatility of prices. Breakout systems are extremely popular because they:
• Are highly reliable even though they have high risk.
• Do not have a lag because signals come at the moment of breakout.
• Allow prices to move freely within the support-resistance band, imposing few restrictions.
Which Is Better, Using the Trendline or Breakout?
The breakout is more dependable because it recognizes an obvious change in the market at the time it occurs. The trendline shows the direction of prices based on their rate of increase or decrease. The breakout usually corresponds to a special event.
The breakout is reliable, partly because it has more risk. Remember that price moves are fickle. Prices may move up, but they do it in a very erratic way. It’s best to give prices room to flop around. Prices may break out of the trading range, make a new high, and then fall back into the sideways pattern for a while. The only thing we really know is that if we bought on a new high and prices then make a new low, something is wrong. Prices shouldn’t make a new low after making a new high. There is good, simple logic in a breakout system.
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