Trend or Range: How to Know in Advance

[HawaiianIceberg]

...trend and range, especially how to differentiate between the two early in the cycle

Aloha schizo!

GREAT topic, thank you for starting the conversation. It’s been a while since a post that has the potential for a good and lengthy discussion has been made. I suspect you have your own answers to some of the questions you ask and are doing this not only to learn, but also to teach. You’ve brought up some great points and there are a lot of things I would like to kick around.


As arrogant as SimpleLikeMe’s question came off about what is a trend and what is a TR, I think it would be important to agree upon to some extent for the thread. Like volpri said, it’s all about how you frame it in your TF. How do you define a TR? 1 bar doji, 3 bars, 10 bars? 20 bars? Trading range ‘behavior’ ? Slope? Volume?

Maybe 3 moves is the most agreeable, but rough, definition. (up/down/up or down/up/down). No doubt we’re in a TR after 4 moves contained relatively well within a box. I believe schizo wants at least 4 moves and volpri wants 3. So that could mean as few as 3 bars. Probably will be difficult to talk about something shorter than that (lets not zoom into faster timeframes to ID them.

How loose can a TR be? Does it need to perfectly fit in a box? How much can it poke out and still be a TR? What’s the difference between a flat range, and an ever-so-slightly slanted range. I don’t know a good answer to this, but I think the idea of a rough box could work.


Then, how do we define when the TR has ended and we’re trending again? Is a false BO with the direction of the original trend the final segment of that trend, or is it part of a TR that started a while ago?

Most trends start within a TRs…


I’ll make a lot of posts in this thread to help keep the conversation moving. I’ve been working on learning trading ranges more than anything else lately.


Mahalo schizo!

 

[HawaiianIceberg]

So the question is how would you know if it will transition to a trend or a range? And it it's a trend, how do you know it won't be a weak one that will die out on you after just a few points?


On that account, does the slope and the amplitude of the price matter?

Trading range days are the most difficult to me. In my log, right next to P/L is what type of day I think happened. When I sort by type-of-day, my P/L trends. Hindsight screams trading range at the end of these days, but in real time that move within the range just looks so strong sometimes, it’s hard to imagine the trend could so quickly fizzle out and turn around.

Here are some observations.


Slopes.

Yes, the true slope (rise/run) is not important, and it doesn’t matter what numbers you assign to the slope on a chart as long as they’re relative to each other. Thanks for pointing out the obvious smart asses. -90 to + 90 degrees on whatever your chart scale is works well for discussion.


Let’s start with a sudden change of slope from positive to negative (or vice versa). I don’t see this happen often unless it’s within a trading range (or at the start off one). “Big up, big down, big confusion” may ring a bell with some of you.

The idea is that if there is a sudden turnaround (news aside), that price-zone will be reevaluated in the future. That price was important enough to cause a sharp rejection and price will likely return there to retest it and find out “why” it was rejected. “Why” doesn’t matter of course; it’s the big kids that decide that one. If it does retest that price zone, you officially have a range. The initial move before the spike, the sharp reversal after the spike, and the retest (up/down/up or down/up/down)


This doesn’t mean a sudden V will lead to a trading range. The ends of trends often have a last, sometimes strong, effort at continuation. Additionally, if that climax is revisited (peak or valley), it could be a long time from now, meaning, it could be within a very long and drawn-out TR. It could also never return there for a retest. The spike is just a heads up that a TR could be coming up.


This image highlights the timeframe you’re evaluating and trading. Big blue range, with smaller red range within it.

Lots more to come about my thoughts on slope alone.

 

[schizo]

No doubt we’re in a TR after 4 moves contained relatively well within a box. I believe schizo wants at least 4 moves and volpri wants 3. So that could mean as few as 3 bars. Probably will be difficult to talk about something shorter than that

Well, more precisely, a range for me is when you have a failed pullback (or failed breakout of the pullback). With just three, you don't know whether it's a pullback or a failed pullback that will eventually become a range (see the chart below).

In a normal pullabck, price should, after pulling back, first retest the high and eventually breakout to a new high. But when that fails, it will go back down and test the pullback area again. At this point, you can have two things:

1) Reversal: price doesn't reverse but continues going lower.
2) Range: price does reverse and go back up. But since this is the second pullback (the first pullback having failed to break out higher earlier), it is considered a trading range than a pullback as shown below.

Since I've previously went through the drill of detecting and trading the chop zone, I'm just gonna leave the link. It's a continuation of multiple posts that spans over many pages so you need to read to the end.

https://www.elitetrader.com/et/thre...the-break-intraday.376990/page-9#post-5889707

(I would add more comments but today's one of those days when I just wanna chill and relax.)

 

[Wide Tailz]

If the current candlestick is within the price range of the previous candlestick, then it is a range-bound oscillation.

It certainly helps the market makers if things gyrate for a while and retrace a big move.

 

[HawaiianIceberg]

Channel Expansion to Trading Range.

A channel expansion means price broke out of its original channel and expanded it. This can be the last push of the move and lead into a trading range. (false breakout) but it could also mean increased momentum that will continue up (Breakout). So, this is a warning that the trend could be transitioning into a range. The second push up does not have to be a steeper slope than the first leg up, but it typically is.

 

[HawaiianIceberg]

BTW, i'm a hindsight all-star lol

There's more to talk about with channel expansions (outside of the trading range discussion) if people are interested

 

[schizo]

A channel expansion means price broke out of its original channel and expanded it. This can be the last push of the move and lead into a trading range. (false breakout) but it could also mean increased momentum that will continue up (Breakout). So, this is a warning that the trend could be transitioning into a range. The second push up does not have to be a steeper slope than the first leg up, but it typically is.

For me, a channel and a trendline are the same thing. You're just redrawing the same trendline at the top. One thing I would add is the slope of the trendline or channel. A trading range is essentially a flat channel (although not necessarily horizontal). So if price breaks out of flat sloped channel into a TR, that is pretty much the same thing IMO. If it broke out of a steep sloped channel, that might mean something else entirely. It's an interesting topic to talk about nonetheless. Hope you bring it up more often.

 

[Gary186]

I hope someone can develop an indicator that tells you whether it is a trend or oscillation and whether it is a strong trend or a weak trend.

I heard this person named "Thomas K. Carr", maybe people can code an indicator according to what he said.

 

[ironchef]

Im with you on the mean reversion of vol, but i'm not an options guy, and i like to make things as simple as possible for my not exceptional brain, so: how many options traders simply buy cheap vol and sell expensive vol? Like scan for unusually high IV in a liquid underlying and sell a strangle (or something)...and scan for unusually low IV and put on a long vega position?

It doesn't work for me. Been there done that.

Why? It is all priced in. My counter parties, those dumb MM's aren't really that dumb. In fact they are smarter than I. They have their yachts and Lambo to prove it.

When you add those overheads like mile wide bid/ask spreads in volatile times, us amateur retails start off in a deep hole.

We do have one advantage: We can pick and choose when, what and how we want to trade whereas since they make market, they generally cannot.

Take care.

 

[ironchef]

In simplistic terms a trend is a BO of something. All bars are either trend bars or trading range bars. All bull bars are trend bars. All bear bars are trend bars. This can be seen by dialing down to a smaller time frame. A bull bar on a 5m chart is a trend on a 1m chart. Ditto for bear bars.

Trends are always a BO of something. A BO of a previous bar. A BO of a flag or other chart pattern such as a range or triangle. If you can’t see it dial down to a smaller TF.

Trend come in two forms. A BO…a spike..that then morphs into a channel. A channel is a weaker form of a trend and begins with the first pullback of a spike. A channel usually morphs into a TR which may go on for some time (because of market inertia i.e. it tends to keep doing what it is doing at least for a while).

A multi-bar BO on a 5m chart is a one or two bar spike a larger TF. A channel on a 5m chart may show up as a PB on say a 15m or 30m chart.

Depending on what TF I am trading I trade what is there but do glance at other TF because they give me a bigger picture what what is say happening on a 5m chart.

As channels get flatter they are morphing into TR’s. However a TR is not a TR until there are 20 bars of sideways motion. Otherwise it could just be a PB with continuation of the previous trend. For example a 10 bar sideways move on a 5m chart that then has a BO of that move is just a PB with continuation on a higher TF like say on a 15m or 30m chart. That is why it is important to define what a TR is on any chart and when to call it a TR vs calling it a PB.

If a trader is trading an established 20 bar TR on a 1m chart he can use TR techniques on that 1m TF but he will have to make quick decisions. That same 20 bar TR pattern on a 1m chart shows up as a 4 or 5 bar sideways move on 5m chart and on a 5m chart should not be traded yet as a TR on that 5m TF.

I know there is a lot packed into what I have just typed but “think” about it.

So, the first step is to identify a TR. The second is to identify if it is broad or narrow. The third is to use appropriate trading techniques to extract profits from that particular TR environment.

Very well said.

I noticed, you trade TR not BO. Why not? Seems to me BO has much better R:R and perhaps higher probability of success?