If a sideways pattern is less than 10 points from peak to trough then it is not a true Trading Range. Trading Ranges also tend to have inconsistent highs and lows with plenty of inter range lower peaks or higher lows. This makes trading range bound stocks much more difficult than many people believe.
When a sideways pattern is less than 10 points wide from peak to trough, attempting to trade the range with a SAR, Stochastic, or other Trading Range strategy is substantially more difficult. This is due to far greater risk because of the constant whipsaw action, long wicks and tails, and the inconsistent highs and lows of the range.
However when a pattern forms with very consistent highs and lows, and maintains a stable level even when High Frequency Traders enter the stock periodically, then more is going on than is often evident on the surface. One market participant is capable of controlling price within a consistent high and low range. Their buying patterns maintain price within a narrower range than a true Trading Range pattern.
Dark Pools are involved in maintaining the neat, concise appearance of a sideways pattern. The type of pattern their buying creates is called a Platform pattern because it is building a base upon which the stock can move upward, with stronger support beneath it when it does move up.
It is common for a stock that compresses in the Platform pattern to have a breakaway gap form. The breakaway gap leaps over prior highs, establishing a new higher high for the stock. The significance of this move is not just that the company had good earnings, but also that the giant funds believe this company is going to continue to have strong growth moving forward.
Most of the time retail traders make the mistake of trying to swing trade these platforms with mediocre to terrible results. The Platform pattern is seldom recognized for what it is, and is often mistaken for a Trading Range or wider sideways pattern. Being able to recognize the consistent highs and lows of the sideways pattern can be hugely beneficial, because the breakaway gaps occur without much warning.
It is important to know that during a Platform pattern Bollinger Bands may not compress, and Stochastic may show a floating pattern or an extreme oversold pattern. So instead of holding the stock to reap the profits of the breakout the investor or trader relying on these indicators exits just before the stock forms a breakaway gap, not identifying correctly that it is actually a Platform pattern instead of a Trading Range.
