Wednesday, April 11, 2012

Chop Zones



This post is gonna be my attempt at an educational type of thing, I'm no expert, but lets see how I do. I'm hoping to do some follow up educational posts, but I've been sick lately, and might not recover fully for several weeks, its pretty bad, so we'll see. Above is a screen shot of a chop zone, pretty standard stuff actually, they can occur at any time, but I'm always ready for them after big swings up or down. As you can see in the screen shot, trading breakouts, or breakdowns from congestion zones is very difficult and usually will result in a losing trade. I could provide more screen shots, but I think its unnecessary, load up as much data as you want, trading breakouts from chop zones results in losing trades, unless of course your using very large stops and smaller targets, but that is also a losing strategy and the day you take several losses in a row you will see the error of your ways.

So what do you do when your chop, and how do you identify chop in time to do something about it? To identify chop can be a bit tricky, but usually after a big swing up or down has exhausted itself and run into a major area of resistance, or support you are in chop, also watch to see if subsequent breakouts in the direction of the trend are failing, that is a sign you are in chop, or a reversal is on the way. The best way to play chop, is to sit out. It's called chop, coz it chops traders into bits, trying to trade chop is very difficult so its usually best to be patient and wait for better price action. Another option if you must trade is to fade the extremes of the range, this is the best strategy in my opinion for trading chop zones and its best to use tight stops and bigger targets. If you are trading multiple contracts taking some off as price goes your way is usually a good strategy, good exit points are the middle of the range and the other extreme, like buy the bottom, sell some in the mid area, and sell the rest near the top. Traders can go on tilt/lose control, just like craps players, or poker players, or anyone who gambles/speculates with money, so taking several losses in a row in a chop zone should be your signal to stop trading either for the remainder of the day, or until the zone has been properly broken out of and price has trended away. It's my opinion that chop zones can cause tilt/emotional damage more than any other kind of price action in traders and cause them to trade more impulsively and with "gut feelings", that kind of thing never works, so stay in control and disciplined when in chop zones. Of course you can always just skip trading these zones and wait for strong trends.