Testing the breakout of a range... How?

H

Howard

Hi all,

Testing an opening range breakout strategy isn't that hard since the range is easily and objectively defined.

But what about breakouts of a multiday trading range?

For instance, today, the SPY broke out of such a range upon the Open and successfully closed in the green. A 4 or 5 day range depending on how it's defined...

So, I assume the first step is to define the actual range and herein is the challenge for me. Sometimes this range might be 2 or 3 days of trading. Other times more. If it were only 2 days, one could simply code something like, "Open > 2 day High".

Maybe this will work anyway since if it's a range, the 2 day high should be somewhat equal to the 5-day high anyway...?

Any thoughts on this? Also anyone who's ran any tests on this and found anything useful?

Thanks!
 
Ranges are meaningless -- each new day is detached, or independent, of one another, o_O

If you base your day trading decisions on the past...I must imagine you must have rather shitty performance,

I shouldn't say completely meaningless...I should instead say it's one small part of the overall, collective, bigger picture to consider,
 
Ranges are meaningless -- each new day is detached, or independent, of one another

According to your logic a tight range bound market that opens up with a big gap down outside of the range taking out 20 days of lows on large volume is no different than a small inside day with light volume - because you think the current day has no relation to previous days. Them are fighting words for us chart traders.

Ranges are very important for us chart/technical traders -there is a lot of feed back in the form of profits when a balanced market breaks out.

Howard -
See this video, long but a gold mine of info, from market wizard Linda Raschke - she covers this gap out of a muti day range setup in detail & considers it a high probability trade.

 
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Thanks for this video, @comagnum. I will watch it in full later today.

I'm also tempted to comment LL's ignorance, but I'll let it pass...

Anyway, any advice on how to actually test this?

My initial suggestion of "Open > 2 day High" won't work, since that may very well occur in a trending market.

I need to somehow define a trading range. Can this be done? Or would I have to backtest this manually...?

Been doing most of my stuff in Excel so far...
 
I am not a trend or range trader, but I'll give you my 2 cents.

I'd ask a few questions before taking a trade.

  • When it breaks the range, does it do it on strong volume? Low volume means not too many players are interested in breaking it.
  • Did it close above the range? Indication that has potential to continue.
  • Was there relevant news that worked as a catalyst to sustain the break? With no news, I'd at least like to see more volume. News can work as a catalyst as large players want to get involved.
  • What happened in the past with this particular stock? Did it continue to go up/down, did it bound back and faded, did it test the levels and moved against it? Some stocks have the same players and they might act as they did in the past.
And like you are doing, record the results so you can easily find whether this strategy is successful.
 
Good suggestions, @tradethetrade.

I have some other conditions I might want to include, but regardless, I'm not yet sure how I could go about testing this efficiently.

Sure, I could scroll charts and do it manually. And it might not take that long for one single stock. But I'd like to do it more efficiently than that if possible.

It seems like the first step obviously would be to define a range in a logical manner and some how record what happens when price breaks out of it...
 
comagnum said:
Ranges are meaningless -- each new day is detached, or independent, of one another

According to your logic a tight range bound market that opens up with a big gap down outside of the range taking out 20 days of lows on large volume is no different than a small inside day with light volume - because you think the current day has no relation to previous days. Them are fighting words for us chart traders.

Ranges are very important for us chart/technical traders -there is a lot of feed back in the form of profits when a balanced market breaks out.

Howard -
See this video, long but a gold mine of info, from market wizard Linda Raschke - she covers this gap out of a muti day range setup in detail & considers it a high probability trade.

More...
darn, couldn't get the audio going.
 
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