An E-Mini Trade When the Market Won't Breakout or Breakdown

An E-Mini Trade When the Market Won't Breakout or Breakdown

My favorite e-mini trades (and my most profitable e-mini trades) are breakouts and breakdowns. These trades tend to perform reliably and are prone to run for very nice gains. Unfortunately, there are days when the market is consolidated into a 20 or 30 point range and every breakout/breakdown fails. After the first few attempts at trading the breakout and breakdown patterns and watching them fail, you quickly realize that a change in strategy is necessary.

It is important to understand that consolidating patterns (or channels) are the most difficult patterns to trade and should be only traded with great care. The quality setups in consolidating patterns are less frequent and many enticing set up patterns form. However, the majority of those enticing setups in a channel can be disastrous. So a trader is left with two choices; one is to simply not trade and make an early exit to the golf course; the other is to carefully weed out all false setups and take advantage of the few good setups that will arise. As any experienced trader will tell you, trading consolidated patterns is tedious. There are many days when I feel trading in these patterns is not worth the trouble.

However, I consider trading breakouts and breakdowns to be trading "outside" the channel and trading in a consolidating market to be trading "inside" the channel. Generally speaking, I refuse to take a trade as the price action ping-pongs between support and resistance in a channel. This type of price action is very unpredictable and you can find yourself sitting in a trade for an extended period of time with negligible results. Even worse, you can find yourself sitting in one of these trades and the market unexpectedly takes off in the opposite direction. Quite simply, the risk is not worth the reward, at least to my way of thinking.

On the other hand, a false breakout or breakdown can present a very intriguing trading possibility. Usually when a breakout or breakdown fails, there is considerable selling or buying in the opposite direction and the momentum from the selling or buying will drive the price back through the original support or resistance and carry the price another 10 points or so. So, in essence, when I see a breakout/breakdown fail, it presents a chance to trade outside the initial support/resistance back into the channel for quite some distance. Believe it or not, this is a fairly reliable trade, though I have seen very little written about it. In executing this trade, you are essentially trading from the outside of the channel back into the inside of the channel.

There are times when the price will pause for a period of time on the support/resistance line just pierced, my experience is that the price action will continue and return to the middle of the channel. I suppose this trading is very similar to a technique called reversion to the mean, though I learned the trade without reversion to the mean in mind. When I see this trade developing now, I will slap some Bollinger bands on my chart and can get a good feel for the length the might travel back inside the channel by gauging where the middle line, or mean, sits relative to the two standard deviations most Bollinger bands utilize.

In summary, we have described a trade that is the exact opposite and a breakout/breakdown and done just the opposite by trading toward the channel instead of trading away from the channel. We have noted that this trade does not occur with the frequency of some trades, but it is fairly reliable. Finally, I cautioned against trading inside the channel as trades in this area are very unpredictable and random.

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