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When it comes to trade setups, it's not always an
either-or situation. In fact, you can double your fun
with bilateral trade setups. Start by overcoming
directional bias when you look at a price pattern.
Although you may see it in your mind as a long or a
short, chances are it will work in either direction.
The trick is to let the price action tell you which
way to go.
Let's back up a step and see how this works. Many
patterns exhibit well-defined support and
resistance. Bilateral setups use both levels for
trade
execution
. A long entry is signaled if price breaks
resistance to the upside. Conversely, a
short
sale
is signaled if price breaks support to the
downside. But you still have more work to do before
taking a bilateral trade. After all, making money is
the whole point of the exercise.
Every trade setup generates a unique
reward/risk profile. In other words, it
tells you how much you stand to win or
lose should you decide to take a
position. Each side of a bilateral setup
carries a different reward/risk ratio.
Most of the time, one side shows more
profit potential than the other side.
This can be frustrating because the
calculation is independent of the odds
that either outcome will actually take
place. So you may have a great,
high-odds setup with little or no
reward, or a lousy, low-odds setup that
would earn a fortune if it ever happens.
The price
trigger complicates bilateral trade entry.
Trading
signals come in all varieties. The
best ones ring very loud bells within very
narrow price levels. One classic example is a
high-volume breakout through a major moving
average. Bilateral strategies force you to
locate trigger prices on both sides of the
pattern. Many times one side will bark much
louder than the other when price hits the
associated trigger.
Bilateral
setups work best when they fit into larger
cycles that encourage price movement in either
direction. For example, a stock drops off a
broad rally into an extended correction. Smaller
patterns within this correction may trigger
short-term rallies or selloffs. Bilateral
strategy lets the trader take advantage of the
mixed environment and execute price swings in
both directions.
Let's review the signposts of this two-way
trading street. We need
well-defined support-resistance levels, a
defined reward/risk ratio on both sides of the
equation, clean price triggers and a big picture
that lets us execute in either direction. Sounds
simple enough, and it is.
The difficulty lies in our ability to control
bias and to let the market tell us which way to
go. Very often the best trade is in the opposite
direction from the most obvious outcome for that
pattern. In other words, the majority piles in
one way, but the profit comes from trading it
the other way.
The good news
about these fascinating patterns is they may
tell you when the move is about to happen.
Congestion often narrows toward a trigger point.
We see this in triangle patterns where two
trendlines converge in price and time. Bilateral
setups may show this convergence through simple
lines, or sometimes through more complicated
volatility cycles.
Volatility drops off through the formation of
most bilateral patterns. It tends to reach a
definable low, and then trigger a sharp price
expansion.
Traders examine narrow range price
bars near support or resistance levels in order
to predict impending price triggers. They also
study classic volatility indicators to locate
these turning points in developing patterns.
Swing traders go long or short, depending on the
opportunity. Bilateral setups cut their
workloads by presenting two possible trades in a
single pattern. So always look at both sides of
the equation when examining a price chart. Then
leave your bias at the door, and take whatever
the market gives you.
