FOREX:

LESSON FIVE
Breakout and Range Bound Plays

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TERMS TO • Volatility – Defined technically as the
KNOW: Standard Deviation of Returns or in the
case of implied volatility is a function of
option prices
• Average True Range – An indicator that
takes the true range (a set of possible
values)
• Low Vol leads to High Vol – An old
saying that means small moves usually
come before much larger moves, as we
would define consolidation

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 HOW TO
RECOGNIZE THE
RANGES

• Following a large
breakout you will often
see a tight consolidation
range
• This sometimes can be
traded if the ranges are
wide enough
• Do not trade whole
position, just work
around your core holding
• This will be the most
difficult to recognize as a
new trader, especially
when the patterns are
textbook

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BREAKOUT!

• Below/Above Key
Levels
• Use as a position
of strength, if
stops are run
mark level as a
possible inflection
point for a retest
• Taking partial
profits at the first
resistance level is
critical
• Watch out for
Bear/Bull Traps
and slowness
through levels

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 IMPORTANCE
OF RISK VS
REWARD

• In any trade you want to find places to add that professional traders will be
also placing their orders.
• Much better to miss a trade than develop a position of weakness that will
compromise your biases
• Don’t overleverage to a point where you can’t let the position have some
room

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SIMULATION 1 USD/JPY Breakdown below long term
support.
JULY 1ST, 2010 Small Bull Trap to shake out the weak hands
USD/JPY

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KEY POINTS Level broke and consolidated near the lows of
FROM that session.

SIMULATION 1
USD/JPY does not move a lot of pips normally.

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TRADERS
PSYCHOLOGY

• From Inside the House of Money Book

• Christian Siva-Jothy :
• “Markets can be unbelievably slow to figure out the consequences
of big events”

• Dr. John Porter on the importance of disciplined trading and

avoiding biases:
• “There’s a great story about a famous local trader at the Chicago
Board of Trade. One day, he was on the floor of the CBOT and a U.S.
inflation number came out that was totally unexpected. Pure
pandemonium ensued. When all the noise died down he walked out
of the pit having made $10 million and said, “By the way, what was
the number?” That, to me captures it all.

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SECOND Finding Range Trades using daily charts
SIMULATION These are not your best trades though
still pose some opportunity
7/1 – 7/6/2010
USD/CAD

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KEY POINTS USD/CAD is has been relatively week
SIMULATION 2 over a period of time
A month later

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WEEK AHEAD Try this weak only look for strong
AND breakout trades
SIMULATION

Week Ahead

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ANALYSIS, Paying attention to fundamental and
COMMENTS, institutional research
QUESTIONS?

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