The fakeout breakout

Discussion in 'Trading' started by zentrader, Jul 18, 2001.

  1. This is a strategy that I have used when daytrading stock index futures. It should work just as well on stocks.

    It is based on the following observations:

    1. The high or low of the day is more often than not made in the first hour or so of trading.

    2. Price rejection (a la Market Profile) is usually indicative of an extreme in the day's range, especially when this occurs early in the day. The key is to be able to define price rejection relatively objectively.

    3. The average daily range is relatively stable over time, and can be used to frame a trade with a favourable risk to reward ratio.

    Here's an example with an imaginary index. Let's say it is at 3000 and the average daily range is 30 points. So we might want to risk 10 points on a trade with a 20 point target, thus being right 50% of the time we will have an edge.

    The setup is as follows. We watch the open and look for a fakeout move. In this case, say 5 to 10 points off the open. It is a fakeout when the move fails within the first hour and the market trades back through the opening price, thus extending the trading range in the other direction. We know that probabilities favour the initial move having set the daily high or low so we use this to trade against, and go with the breakout in the other direction.

    For example: market opens at 3000 and trades upwards to 3007 in the first 30 minutes, then starts heading back down. We go short on stop at 2999 with our buy stop at 3007, risking 8 points. Then put in a profit target such as 16 points, hold to the close, or trail the stop.

    Hope the above makes sense. I will be interested to hear if this pattern works on individual stocks.

  2. zentrader =)

    what you just described is a 5 minuite high/low break.. or a 30 minuite high/low break.. Oliver Velez teaches that in his book "The Master Daytrader".. its really a great setup..