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Markets most often trade within a range (see chart on right). The size of the range and duration of trading within it, varies considerably. Inevitably, an attempt is made at a break. The break from balance trade is no more than just that, charting a balance area, anticipating a break, recognizing the break and then monitoring for continuation. This is no more than simply making sure that the break is indeed real, and that sufficient trading is occurring outside the previous balance area to confirm acceptance of price at new levels. Once the break is confirmed, a stop can be set at a predetermined level within the previous balance area. This might be for example, halfway between the balance area high and low (It should usually not be at the upper most level of the previous balance, because this will likely be tested again).
Sometimes however, a break from balance will occur, but there will be no follow through. No significant volume will occur at the new highs (or lows) outside of balance, and the market will (often quickly) retrace. When the retracement occurs, that price movement must be monitored. Will price once again be pushed back into the previous trading range? If so, and sufficient volume occurs and time passes to suggest acceptance back within the previous trading range, then the likelihood of an attempt, and likely break, at the OPPOSITE side of the trading range is high. The trade is to go with that intention once the described criteria are met.
With the Across the box trade, the box is nothing more than the trading range. It is described as across the box simply because price must first attempt a break in one direction, make the break, fail to follow through, then once again find acceptance within the box. Then price is expected to move ACROSS THE BOX to the OPPOSITE side, and likely test and break there.
This is a very simple trade that relates to the Auction Process described here. Price will test its boundaries, and finding no buyers (or sellers) at one extreme it will move towards the other.
Monday July 2011. The Dow has traded range bound for some time. It breaks lower, still within the range but on August
4 breaks sharply below its prior trading range (the trade here would have been a break from balance short).
The next day is a balancing day (as
investors try to decide what to do), but the following trading session is sharply lower again. Over the next two weeks the market reverses to test the initial breakdown level, then drops
lower again, and a trading range develops. This persists Until October 4, two months after the break. On this day the Dow breaks below the lower
level of the trading range, but there is no follow through, intraday rebound occurs with the market UP on the day, and over the next few sessions
the Dow moves back into, and then to the upper end of, the trading range. THIS was an ACROSS THE BOX TRADE.
In this example, the trade would have been to go long, once you recognized that the likelihood of price moving back withing the trading range was high. When exactly, you would have recognized this would depend on experience, intuition, market knowledge, and a host of other factors. Once you did recognize it, and initiate your long trade, a stop might have been applied at the low of the trading day October 4. It might also have been applied at the open price of that same day, recognizing that once price ventured below that level, it would be testing the excess established on that morning.
Another example can be taken from the bond futures market in early October. (See the WindoTrader Market Profile Chart with trading range outlined below). A trading range had been established over a several day period. This range was well defined, but eventually broken on the downside leaving bond traders to think that the long awaited "break" in the bond market had come. See chart below.
The break to the downside lasted only two days, then prices rallied back into the box. (See bottom Chart) The trade here would have been to go long once prices were established back in the trading range. A level somewhat below this range could have been used as a stop. The chart below shows how price rallied rather quickly, then broke out of the box on the upside.
The Across the box trade relates to trader mentality with regard to the Auction Process. If you have not yet visited our description of the Auction, please link to our description in the auction process.
You may also view our excess trade, and our break from balance trade.