Quantify Breakout Potential

Traders, especially short-term traders, tend to be impatient. We all want the market to move in our favor directly after entering a position. Great timing, eases anxiety, decreases risk and increases profit potential.

Choosing when to enter a trade may be as vital as where to buy or sell. It is common for a trend to develop after a consolidation phase. Conversely, consolidation phases typically follow trends and the circle repeats. To increase the odds of catching a trend early refer to horizontal measurement also known as “time at price.” This dimension is best illustrated by using bell curves (market profiles and macrographs). It is often used to determine if a market has spent too much time at price. The opposite of this indicator measures the vertical dimension (high minus low) and can be used to signify if a market is overbought or oversold.

The chart below shows a daily market profile. Each letter covers the high and low of a 30-minute period. When the letters are stacked together a bell curve forms. From that profile we can determine the high volume or fairest price of the day (highlighted blue) and we can also construct a fair value area, which includes approximately 70% of total volume.

On most days the high-volume price trades in 8-9, 30-minute periods. Short-term breakouts often occur after a session where the high-volume price is visited in 12-13, 30-minute periods during the day. When too much time at price is coupled with below average ranges, an above average vertical move frequently occurs.

Now let’s apply that same logic with using a longer time frame. The macrograph below shows weekly bell curves. Each day is color coded and the high-volume price is vividly displayed. Note that vertical moves occurred shortly after gold had a below average week range and spent above average time at price (TAP).

To enhance timing of trade it is a good idea to check if the time at the high-volume price has surpassed the norm. Once a market has condensed the odds for a breakout increase. So, the timing for directional bets are best after fair value has been established and the range falls below average. These signals should save option traders the loss of premium due to time decay as well.

John Seguin, Market Taker Mentoring

Trader Education