During periods of consolidation, markets tend to trade sideways or range-bound until you determine whether the underlying trend will continue or reverse, and a breakout occurs. There are typically plenty of opportunities to take trades when a market is range-bound if you’re a proficient risk manager. This week, the Topstep coaches are talking about what to look for when trading ranges and identifying potential breakout scenarios.
Funded Trader Shoutout
Did you know that the Topstep community represents traders from more than 140 countries? It’s true, and we like to recognize our international traders as much as possible.
This week, we’re going all the way to Hungary to give a special shoutout to funded trader Levente N. Levente had a marvelous day catching the rips in the E-Mini Nasdaq-100 futures and pocketed about $2,300 by mid-morning. I don’t care who you are; that’s a great trading day!
Ranges & Breakouts
First, we think it’s important to note that ranges and breakouts can occur on any timeframe, so it doesn’t matter your trading style; you will eventually find yourself trading a range-bound market.
One of the best ways to confirm if the market you’re trading is in a period of consolidation is to identify chart patterns. Then, when a pattern is detected, you can dig in and start to plan your trading strategy.
The perfect setup for trading a range and breakout would start with identifying the underlying trend; this can help you decide which side of the market to trade. For example, suppose the underlying trend is moving higher, and while the market is in consolidation, you see volume increasing on the upswings. In that case, you can reasonably assume a breakout to occur to the upside, so it would be wise to stick to trading the long side of the market.
You can learn more about chart patterns and managing risk right here in our Topstep Trading 101 blog series.
Beware The False Breakout
It’s also common for a market to lure traders in, only to turn around and retest the opposite end of the range. This is what’s known as a false breakout. The best way to counter a false breakout is to have an exit strategy in place as soon as you put the trade on. Know when and where you’re getting out, and never let a winner turn into a loser. Remember, the markets tend to do whatever favors the least amount of people, so practicing sound risk management is always encouraged.