Trading Back Into A Range
by John Sweeney
Last month in Settlement, I wrote briefly about some simple ideas for defining nontrending periods.
Although exotic approaches are possible, simple things are easier to teach to computer packages. The
program I've been using here for testing, Behold!, has a great worksheet capability and many
sophisticated functions, so virtually anything can be defined mathematically. The problem with this
software occurs when defining trading rules beyond entry and exit. Reversals and add-on trades are
tougher if not impossible to program. When trading a range, you want to reverse if price breaks out from
the range and starts trending. But given Behold!'s limitation, I won't be able to show you that here.
Instead, I'll just focus on evaluating a simple trading range model.
Since I can't show you an example of a trading range breakout with this system, the results I am going to
present here are pretty pared down. I generally find that working a narrow range of prices is not terribly
profitable by itself but it does prevent losses from trying to trade a range with a trend-following system.
Since preventing losses is the first rule of investing, learning to identify and work a range is vital. Also,
as outlined in Settlement last month, proper range trading should set you up for a good entry into a trade
should a trend begin to develop.