In last night’s edition of Swing Trader’s Insight (STI) I labeled the eMini S&P as a breakout candidate for today, as Thursday had the narrowest trading range of the previous seven sessions (an NR7 day). This setup gave a good entry on the open this morning and today has seen a strong rally into new contract highs.
I have a number of setups I use for STI, covering a range of market conditions. However, if I had were to focus on just one setup to trade it would be breakouts. Most of my setups seek to anticipate a market’s likely direction for a trading session, based on the direction the market trended in the previous session.
In contrast, breakout setups are identified by a combination of a directionless and / or narrow range session. These sessions are evidence of a lack of conviction by traders – bulls are unwilling to buy at increasingly higher prices or bears are unwilling to sell at lower prices. These setups are often resolved by a new consensus on a “fair value” price, and markets often make a strong sudden move as traders move the market toward the new fair value.
So yesterday the eMini S&P futures had such a breakout setup, as Thursday had the narrowest trading range of the previous seven sessions. This told us to anticipate a breakout, directional move today as yesterday’s indecision resolved itself. For a breakout setup day, we look for a move past near in support or resistance to serve as our trade entry and a springboard to a larger move in that direction as the move gains momentum in a positive feedback loop.
Our standard entry levels for a breakout move are the previous day high and low, those being the prices at which traders decided the market was either “too expensive” to continue buying or “too cheap” to continue selling. A move beyond the previous day high or low is (we anticipate) the genesis of a move toward a new consensus level.
For the September eMini S&P futures, today’s reference price levels were the Thursday high of 2447.00 and low of 2439.00; we would look to go long if it rallied above the Thursday high or we would go short if it dropped below the Thursday low. Unlike some setups, with breakout trades we don’t attempt to anticipate a direction for the move as the lack of direction in the previous session makes it difficult to anticipate direction of the breakout day.
Normally I trade stock indices during the stock market hours of 8:30 AM CT and 3 PM CT. There are times when moves get started before the 8:30 open however I find that pre-open moves often either end up being fake outs or the market retraces and gives you another entry opportunity after the open.
That was the case today. In the premarket, S&Ps rallied above our 2447.00 reference price, making a session high of 2449.00. It backed off from there, and opened the day session at 2446.25. It made an early low of 2444.25 and then rallied above 2447.00, which triggered our long entry. I like to use stop orders to enter these trades, using orders that are a few ticks above our high reference price (or below the low reference price on a break).
Today our long entry got triggered a few minutes into the day session. Our initial stop loss could go below the day session low of 244.25 or below the overnight low of 2442.00 if you wanted to give the trade more room. Regardless, we want to be in this trade as long as the market has upside momentum so we would want to close our trade if the market made a new low, i.e., if the market showed downward momentum.
S&Ps showed upside momentum for most of the session as it made a series of higher highs and higher lows, which is the type of trending move we anticipate on a breakout day. Around 11:30 AM it rallied through the previous contract high of 2451.50. This level served as a secondary reference price- if you wanted to add to your longs, the held trade above the previous high was a signal to do so. (Had it failed to hold above there it would have been a signal to take profits.) The rally continued on to make a session high around 2:40 PM at 2461.25.
Breakout setups can be great to trade as they allow us to home in on markets that may be set up for a large, quick directional move with small pullbacks. These are exactly the kind of setups futures traders should be looking for.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
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