Breakout of a Range Defined

By "breakout of a trading range" I mean any close that is equal to or greater than a .236 expansion of the initial magnitude of the range of prices once the range has been established.

Iil show the calculation in a moment. What I have done is to create an "envelope" surrounding the congestion at plus or minus .236 of the initial height from the low to the high of the range.

The reason for using the initial height is that some ranges widen as they age, which tends to make their breakouts less emphatic. I am not concerned with those congestions that narrow as they age because they break out with great force from the envelope, and the purpose of the envelope is to avoid false breakouts.

? [19 „ Expansi

The formula for computing the expansion is as follows and is quite simple:

Highest high minus lowest low for the initial range, multiplied by .236.

The result is then added to the initial high of the congestion and subtracted from the initial low of the congestion area.

For the situation at hand I now have a low of 4737 on March 10, and a high of 4909 on April 19. Subtracting the low from the high I have a height for the range of 172. Multiplying this by .236 gives 40.59. Adding 40,59 to the high of 4909, I get 4950 rounded to the nearest tick {which for Gold is 10) as the upper limit of my envelope. Any breakout on a close at or over 4950 will cause me to be a buyer of Gold DURING THE CLOSE OF THE DAY ON THE DAY OF THE BREAKOUT, OR AS LOW AS I CAN BUY IT the day after the breakout!

The lower limit of my envelope is calculated as the low of 4737 minus 40.59 which gives me a lower limit of my envelope equal to 4696 rounded to the nearest tick. Any close at or under 4636 will cause me to be a seller of Gold DURING THE CLOSE OF THE DAY ON WHICH IT BROKE OUT OR AS HIGH AS I CAN SELL IT the day after the breakout!

--> ;:. Range Stop Placement

When trading the breakout of a range I place my initial stop above or below whatever price constituted the opposite extreme of the envelope. If I sell Gold at 4696, I will place my initial protective stop at 4950. If I buy Gold at 4950, I will place my initial protective stop at 4636. This is only a catastrophic protective stop at the time I call In the order. I determine this stop placement prior to my entering the trade!

Once the range has been established, it is essential to call my broker and place my

order.

5533

5431 5330 5229 512? 502& 4925

4B23 4722 4621 4520

,146 expansion line-----

;<-.236 expansion line 7-]r(-High the range

<-

Inner enuelope discussed in Part

D=0418 0=4987 H=4917 L=4698 C=4894

The anatomy of the envelope from outside to inside is: The outermost lines are the .236 expansion lines. The next set of lines are ,146 expansion lines, called mid-out lines.

The next set of iines are the original range lines.

The final set of lines are for an inner envelope explained

in Part V.

In this series of Gold trades 1 will be using the .236 expansion. In the series of Wheat trades that follow, i will be using the .146 expansion. The choice of which to use wiil be explained a little iater.

Figure 7 On 4-18, there is a minor breakout of the top of the range, but because of the envelope, I am saved from a false breakout.

Trading By Ttie Book - Part I

5533 5431 5339 5229 5127 5B26 4925 4823 4722 4 21 4520

E 4/18

D=e58b 0=4745 H=47B? L=4713 C=4730

Figure 8 On 5-6, aittiough I didnt get a fill on my order, it did result in a new lov for the range. However, it is important to note that even though there is a new low, Ill stick with the original parameters of the range, with the low at 4696 and the high at 4950.

Again my envelope has saved me from a false breakout.