The 3 Basic Types of Trades & How to use all 3  

There are 3 basic types of trades.

• Trend Trading
• Range Trading
• Breakout Trading

Trend Trading--A trade is entered in the same direction as an existing trend. The trigger for the trade may be a retracement (pull back) to a specific level or some other marker or indicator. Trend traders will enter several trades along the trend, taking profit on one trade and then entering another after price has pulled back. The two key factors are time frame and defining a trend. The saying, "The Trend is your Friend", is both wise and profitable. Trading with the trend is the least risky of the trade types. In another post I will explain how I define trend, set markers, and the execute trades based on trends.

Range Trading--A long trade is entered at or near the bottom of the range, and a short trade is placed at or near the top of the range. A range is identified by parallel (or roughly parallel) trend lines to define the top and bottom. These lines may be horizontal, inclining, or declining. Again time frame plays a key role as a higher time frame will be used to define the range than the time frame used to execute. For example if you are trading based a hourly chart, you would use the 4hr chart or greater to identify the range. A range by definition occurs over an extended period of time. I trade on a 15min chart, but I look for ranges on the hourly or 4 hr charts. Successful range trading requires an established range. The market alternates between range bound movement and trending movement. There can be long trends moving one direction while the movement is entirely (or mostly... or sort of) contained within a climbing or falling range. Knowing that range can be very profitable as the range itself tells you when to enter and exit profitably. Oscillating indicators MACD, Slow Stochastic, etc.), banding indicators (Bollinger Bands, Avg True Range, etc.), reversal patterns (Diamond Tops, Morning Star,etc.) or support/resistance levels (Pivot Points, Fibonacci Levels, etc.) are used to trigger a range bound trade. In another post I will show you how to draw ranges, enter a range trade and the indicators I use.

Breakout Trading--A trade is entered when price exceeds a level of support or resistance in the direction of the breakout. This can be a trend type trade where price has gone outside the established range (either high or low) or it can be a reversal. The key is knowing that a support/resistance level has been breached. A term I love and I look for all the time is called a Dead Cat Bounce. Price has been falling and then pulls back at a level of support. But the pull back is weak (the "dead" part) and after a brief pullback (not to a resistance level) price then falls past the previous low quite dramatically. Taking a short position in that situation is a breakout trade. Breakout trades can be the most profitable but are also the riskiest. It is very hard to define the breakout and rather than moving dramatically beyond the breakout level, price will transform from a dead cat to a live rocket going against you. I will show examples of false breakouts and how I trade on breakouts in another post.