Chapter 22
Tight Trading Ranges
A tight trading range is a common pattern that has been called many different things, but none of the terms is adequately descriptive. It is any sideways channel of two or more bars with lots of overlap in the bars, multiple reversals, many dojis, prominent tails, and both bull and bear bodies, and it can extend for a dozen or more bars. Most stop entries result in losses and should be avoided. If the average daily range in the Emini has been about 10 to 15 points, then any trading range that is three points tall or smaller is probably a tight trading range. A range of four and sometimes five points can sometimes behave like a tight trading range as well if the bars are large.
The bulls and the bears are in balance, and traders are waiting for a breakout and then the market's reaction after the breakout. Will the breakout continue, maybe after a small pullback, or will the pullback grow into a reversal and soon be followed by a breakout through the opposite side of the trading range? Just because the market is sideways, do not assume that the institutions have mostly stopped trading. The volume within each bar usually remains high, although less than that of the bars of the trend that preceded it. The bulls and the bears are both aggressively initiating new trades as they both fight to create a breakout in their direction. Some traders are scalping in and out, but others are adding to their positions and eventually reach their maximum size. Eventually ...
