I do not know who originally named that dreaded phenomenon of getting into a trade only to watch it leave you behind in the rearview mirror but, they are genius. The imagery of a bullwhip violently ripping the anticipated profit from your hands while your equity curve gets sawed to shreds. Yes, whipsaw is the perfect word. However, I have a simple little technique based off of time analysis that has saved my profits countless times from that jerk whipsaw.
For these examples, I’m going to focus on opening price range breakouts. To begin, we first must define the length of time for the opening rage. I suggest 30 minutes for starters. Next, we are going to determine our breakout time frame by dividing the opening range in half. For example, 30 minutes ÷ 2 = 15 minutes.
Easy so far, right? We now know two critical pieces of information.
The final step of the setup phase is to mark the price high and low of the opening range. You can use support and resistance lines. Personally, I like to use a box. Now it’s time to watch for the breakout. Many ill-fated trading systems suggest that you wait for the price to break out of the opening range, and then you hop on board. Unfortunately, I think this is a bad idea as I can already see the grim reaper picking up his whipsaw and heading toward your trade. Instead, please allow me to present a different set of rules.
First and foremost, the price must remain outside of the opening price range for a minimum of your predetermined breakout standard. In this example, that’s a full 15 minutes. By “outside,” I mean it… outside, no candle wicks, no candle bodies. Nothing can enter the opening price range for a full 15 minutes.
Set your watch and go. Suppose a price breaches the opening price range, the clock restarts.
Here’s an example:
I’ve marked the high and low of the opening range with a yellow box on a 5-minute chart. That range consists of 6 candles or 30 minutes of trading. Now, we wait for the breakout.
I started with this example because rather than trigger a new trade, it shows the system preventing us from being whipsawed! The failure of price to spend the required 15 minutes outside the critical opening price range helped avoid a long, disappointing trading session. Can you already see how using time constraints for evaluating a trading decision creates a much-needed governor?
Let’s look at another example.
Again, I’ve marked the opening range with a yellow box. Let’s walk through the price progression:
Notice in the second example the failure of price to recover back inside the critical opening price range. You can also see how the price battles the opening price range for 50 minutes without success, and then the breakdown continues to new session lows.
Deploying time into your trading decisions and execution process can help you avoid false breakouts and chop zones by using a simple time-based rule. This works on multiple time frames too.
The following example is on a daily chart. Let’s set it up:
Let’s walk through the trade:
Do you already see how price and time can work hand in hand to confirm movement?! I encourage you to look back at your last 20 trades and see if this confirmation system would have provided a different result. Some of your winners may indeed have slightly smaller profit targets. In my experience, that is more than compensated by the avoidance of the dreaded whipsaw, both in your equity curve and also in your trading emotions.
Stay out of the chop/battle zones of the larger players. Those are the tops and bottoms of the opening ranges we identified. Instead, keep the wind at your back, using time confirmations as your guide.