Volume 4
Home On the range



12/25/21



This is a very brief introduction to the topic of range-bound trading. As a new scalper and daytrader, it behooves you to learn, and study, this trading opportunity. Tempus Fugit and all, so let’s get to it.

If you are new to scalping, it is often difficult to find good entries. How are we to identify reliable directional momentum into which to cast our net? It is difficult there is no doubt. But it becomes easier with experience. And experience in the market is what we all need more of. Seasoned traders can seem magical to new traders their abilities to place trades with confidence and kill them mercilessly when necessary can seem preternatural, or even metaphysical if you are wired toward such sparkliness. But there is no magic at work…seasoned traders who are consistently profitable are simply benefitting from unknown hundreds, if not thousands, of hours of experience.

Remember: trading is not gambling…trading is a specific set of skills that must be developed like any other skill. Scalping, of course, is very much included. It is not dissimilar to learning an instrument, playing a sport, or driving a car. Our skills must be advanced by study and practice. We can all probably drive a car, but few of us could work as professional stunt drivers…not too many of us can drift for ten solid seconds. As traders, we have to have good entrance criteria. I am no expert, but I have found some things that work for me.

So, as a trader and as a scalper, you need a particular set of skills. And you need to hone them. All the time. Like, really…just all the time. Trade as much as you can do it as much as possible. And, of course, since you are diligent students you already know that you must use small, if not tiny, position sizing as you learn. You control how much you lose simply by how much you choose to spend on your positions. The more you trade, the better you get. So don’t risk much at all until you get better. So let’s explore a type of trading that is great for scalping. It’s called range-bound trading, and when the opportunity appears, jump on it. You can read more about this at Investopedia however, let’s look at a real world example of some range-bound trading.

Class: to the charts!

The last volume discussed price action in Visa ($V) in Fall 2021, and we continue with that today. Image 1 below is a $V daily chart depicting a long period of rise and decline that features a highlighted sideways area that bounced between the low 220s and the low 230s, more or less, for about three weeks. Not long into this area, I realized we might be entering the hallowed “range” where price can…sort of…kind of…reliably be predicted to reverse around certain floors and ceilings. This is always tricky, of course, and always subject to change. But sometimes, a range appears and you seem to suddenly understand you are in a range. For me, this happens once you are already in it. I hesitate to discuss intuition, but I do think there is something to that. It comes with a little experience, but there is a sense of it when it appears. And, of course, the data appear when you see it bounce between a similar floor and ceiling a time or two. I know this isn’t as solidified as we might like it to be, but suffice it to say this: when a reliable range is identified, strong scalping and day trading opportunities emerge. When you are new to trading, learning about range bound trading should be on your to-do list. When you can identify a relatively reliable range, it presents power profiting opportunities.





In my very non-expert opinion, the best way to play a range is to buy in near the bottom and sell when buying pressure eases. Eventually, you can go both ways…buying puts after the range top is reached and price action heads back down to the (hopefully) quasi-predictable bottom of the range. But I do think buying bidirectionally is a bit more advanced, so (as always) proceed with caution and small position sizes when you are learning!


In this case, I placed four trades during these range-bound time. Mind you, this is not a lot of trades for that time period. New traders often overtrade, and that is one habit I broke many moons ago. Plenty of traders traded this range more times than I did. That’s fine. I know my tolerances, and I know my trading psychology.


During this period, my basic approach was buying at-the-money (ATM) calls when the UL(underlying stock price) was in the 220s and selling them near UL 230s. Sometimes I would hold a day or so, but usually they were intraday. I used my typical exit criteria as discussed in earlier volumes, but take a look at the chart labeled image 3:





This became somewhat reliable for a time, and (after the post-earnings drop that invalidated this range), I fondly recall this range as a profitable and fun time of trading with relatively low stress.

Of course like those sun-spangled days of our misspent youth, ranges always end. That’s okay with me I am no nihilist. But the point is that if you can identify them and learn to trade them with scalps and intraday trades, you can find a lot of profit as the price action bounces rather predictably. And again, the ultra-short term nature of scalping is one of its greatest merits. Quick in and out, and you can avoid getting caught on the wrong side of a breakout. I definitely recommend learning about range-bound trading in your near future.

BONUS LESSON: DON’T HOLD OPTIONS THROUGH ER

This likely needs a volume of its own however, let’s discuss holding options through ER (earnings report) for a hot minute. Part of $V’s story over the fall of 2021 definitely includes the late-October earnings report. It is relevant here because the ER drop signals the termination of the above-discussed range.

It seems options traders are drawn to playing ER like proverbial moths to flames, tiny winged Ahabs. Most active traders have a negative ER story, and I am no exception. As a result, I don’t hold options through ER. Most of the full time traders I know and communicate with on a daily basis do not hold through ER. It is a coin-flip it is gambling, not trading. Look at the shaded area on image 4 depicting the earnings drop on the daily:





That is a massive drop in $V’s price action for that time in its history. Sure, anyone who held puts through Visa’s ER won big. There is no doubt about that. I am certain there are options traders who bought ATM puts at the last possible moment before ER fully intending to play the ER coin flip…fully intending to gamble. That is fine but realize it is what it is…a gamble. And, of course, anyone who held calls took heavy losses. Nota bene: it isn’t skill or the lack thereof on either side ER is a coin flip. Sometimes the ER is positive, everything looks great, and the underlying plummets. Other times, the opposite is true. Seek neither rhyme nor reason when this happens just be one with the fact that it often happens. I just have one bit of advice for new traders: don’t hold through ER. And if you do, understand and be fully aware of the fact that you are gambling.

And, if you are controlling your position sizing and using discipline, that’s okay sometimes. I tend to buy slightly OTM long strangles in certain situations when I am feeling Extra-Pagany…this is true.

However, with my old friend $V, I sold my last set of these range-bound calls right before ER for a small gain. Then, came the big drop. There is no real logic behind why $V fell so Luciferian post-ER. It bled down and stayed, struggling to rise, beaten down by forces unknown, far above my paygrade. In fact, at the time I write this on this beautiful winter solstice night of 12/21, it is just now getting back to the $215-$216 level. Those range-bound glory days mentioned above are long gone. But they will be back. Seasons come and seasons go. And when the range appears again, I’ll be there…weapon at the ready, concealed in the underbrush….

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