This technique can be used for any market that has a decent daily range. If you look at any chart, what do you see? You should see a succession of bars that are doing one of three things.
1. Going up
2. Going down
3. Going sideways
Unless todays bar turns out to be an inside day or very rarely the high and low of today are exactly the same as the high and low as yesterday, then we will have a new high or low.
Think about it. Todays bar, in all probability will make a higher high than yesterdays bar or a lower low than yesterdays bar. This information is very powerful.
The calm before the storm - Bollinger band squeezes - ASX ::
High volatility usually signals the end of a trend. Low volatility usually signals the calm before the storm or the calm before a breakout in the share
http://www.asx.com.au/resources/newsletters/investor_update/20070808_bollinger_band_squeezes.htmHOME |
For example, company XYZ had a range of 200 points (high minus the low) yesterday. Today the high might be 50 points higher than yesterdays bar or 50 points lower than yesterdays bar. If we can find the average daily distance between the high of yesterdays bar to the high of todays bar and the average daily distance between the low of yesterdays bar and the low of todays bar, then we might have a trading opportunity.
Make yourself a little excel sheet or grab a pen and paper and start tracking the high and lows of each day. Then deduct the high of today from yesterdays high and the low of today from yesterdays low. After you have a few days worth of data you can get an average. On the excel sheet, below the first five columns are the date, open, high, low and close. DR is daily range, TH-YH is todays high minus yesterdays high and YL-TL is yesterdays low minus todays low. In the TH-YH column, I only record an entry if todays high is greater than yesterdays high and in the YL-TL I only record an entry if todays low is lower than yesterdays low. All pretty simple stuff.
OK, as you can see, the example of the GBP/USD (Pound/Dollar). The average breakout up was 54 pips and the average breakout down was 60 pips. The next thing to do is apply this knowledge to our trading.
On the 2nd September the high was 1.7972 and the low was 1.7864. We are looking for a breakout of either of these points. It doesnt matter which way. So on the 3rd September you mark the previous days high and low and monitor what happens when it reaches these points.
The way I trade this setup is to wait for the market to test the low or high of the previous day and then pullback. I dont enter on a break of the previous days high/low, I wait for a pullback of either a test of the high/low or a break of the high/low.
As you can see from the chart, the market came down and tested the low of 1.7864 and then pulled back. The low that was made was just a few pips lower than the previous days low and formed a little support area. That support area is the breakout point. You can place an entry order a couple of pips below the support area with a target of the average YL-TL as a target, which in this case was 60 pips. The stop is a bit more tricky. If the pullback is not too big you can place your stop just above the pullback area (resistance). If the distance is too great, then just use Dollar stop.
You can even take this down to a 1 minute chart and scalp the market with a very tight stop. There are loads of ways to trade this setup. You could add some indicators for confirmation. You could use the entry as setup for a position trade. You could even concentrate on inside days where the breakout might have a much larger range. However you decide to trade it, at least take note of the previous days high and low.
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High Low Breakout Technique