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Price Compression: Trading Quiet Periods for Breakout Gains
Identify price compression in stocks and trade the ensuing breakout with a defined risk framework. This strategy explains the measurement, the entry filter, and the stop placement.
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A price compression pattern signals that a breakout is approaching. Markets cycle between quiet, low-volatility phases and sharp, directional moves. The transition creates a trade: position for the breakout before the move accelerates.
Compression shows up as a narrowing range or falling volatility. Bollinger Bands contract. The 20-day average true range drops relative to its own history. On a price chart, daily bars get smaller, often forming a tight coil. The standard read is simple: buy the first bar that closes outside the coil and ride the expansion.
That works sometimes. The better approach adds a filter. Many breakouts fail on low volume, reversing the same day or the next morning. A trader who buys the first tick above the coil often gets stopped out before the real move starts. The more reliable entry waits for a close outside the compression range combined with volume above the 20-day average. If the breakout bar has low volume, let it fade and look for a re-test of the range boundary. A successful re-test that holds the edge then produces a cleaner move.