Kevin Woghiren

Guest Article by Joseph Bridges, founder and CEO of Capital Research and Trading, LLC

visit Joe at www.treasuryincomeengine.com

Trading volatility breakouts has been around for a long time, and if you think about it carefully that’s really what you’re trading regardless of what you think you’re trading.

Volatility, assuming it’s in the direction of your position, is what validates your decision. Lack of it almost assuredly means your assumptions are incorrect.

At the moment, I’m almost entirely consumed by the Treasury futures markets and I’ve noticed a simple pattern that, for lack of a better term, we’ll call it the “Eager Beaver”.

“Eager Beavers” are the eternal optimist of the trading world; all they see is sunshine and rainbows at the beginning of each day. “Eager Beavers” want to enter early and ride the wave for the big profits that will come at the end of the day.

Well folks, it happens that way some of the time, in fact just enough to keep them coming back to the trough and believing in the Easter Bunny, but not as often as you may think.

What I want you to do is focus on the highlighted area of the chart above. There are a couple of things to notice. First, we opened lower and immediately traded to the end of the previous day’s range and then went into a consolidation phase establishing a range 128-28 for a high and 129-17 for a low. At the moment you’re looking at both buyers and sellers at a standstill neither having the upper hand and are waiting to see what will happen next.

Now we can see that it was the sellers who were on the wrong side as the market breakouts to the upside and begins to head higher, obviously you don’t want to be short this market at the moment and this where the trap is laid. The buyers are happy and confident at this point.

Most traders think in directional terms, they either want to buy or sell. They have a bias for one side or the other. There are a few that want to play both sides repeatedly during the day, but they are a minority.

Here’s what happens next: the breakout buyers are neither rewarded nor punished by their decision. They’re either up by a few or down by a few ticks. There’s no urgency on either side.

Once the apex is broken off the consolidation phase, the breakout buyers start to run for cover plus new sellers start to come under 129-24 - of which I’m one.

Here’s what’s happening: the pros are smoking the retail trader’s with this gimmick. Somehow, someway the ordinary folks get tricked into a position early in the day by a false breakout.

Then later in the day they get caught equity wise because they HAVE to run for cover for margin reasons.

That’s where the opportunity is now, trading against the guy who HAS to trade because of his limited capital.

That’s the antimony of trading against a “False Breakout”.

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