Range Trading: How It Works, Indicators & Risk Management

In the chart you can see this range indicated with the blue corridor on the lower half of the chart. Consider a sell or short order when the price reaches the resistance level, where the price has historically faced downward pressure. The content focuses on presenting the factual aspects of range trading, emphasizing the mechanics and technical considerations inherent to each strategy without subjective assessment.

  1. The range depends on the type of security; and for a stock, the sector in which it operates.
  2. These support and resistance levels may be a moving average or some other price level that you’ve identified as significant.
  3. When the bands are thin and contracted, volatility is low and there should be little movement of price in one direction.
  4. We encourage you to learn how to do technical analysis of stocks in our blog.
  5. While many investors play the long game, others pursue the short-term gains of trading stocks within a short period of time.

The past few candles have shown many tails with prices consistently closing near the highs of each candle or somewhere in the middle. This tells traders that the market is finding demand near those prices and struggling to close lower. In other words, there’s no more steam and the price is likely to reverse from here. Here’s an example (Figure 4) showing overall strength coming in following extended downside. No matter which strategy you employ, it’s important that you take your time to learn the basics and feel confident before trading with real money.

These patterns can produce strong bullish or bearish breakouts when the prevailing trend resumes, so many prefer to trade them as breakouts rather than ranges. Macroeconomic factors such as the economic cycle and interest rates have a significant bearing on the price of securities over lengthy time periods. A recession, for instance, can dramatically widen the price range for most equities as they plunge in price. The range depends on the type of security; and for a stock, the sector in which it operates. For example, the range for fixed-income instruments is much tighter than that for commodities and equities, which are more volatile in price. Even for fixed-income instruments, a Treasury bond or government security typically has a smaller trading range than a junk bond or convertible security.

You can look for current ranges or find trending markets that are starting to slow down. Range trading will take into account both extreme zones and a trader will look to position a trade against the potential zones of support and resistance that form the range. The risk, however, is that the security might not stay within this range.

The length of time the asset has been trading within its support and resistance lines can also tell you how stable they are. After all, you need at least a few consecutive highs and lows before support and resistance lines are established at all. But if the asset bollinger bands strategy has been trading within them for more than a hot minute, that implies it might just stay put. You can often find a period where you can draw a line across the last few lows (the “support” line), and another across the last few highs (the “resistance” line).

In fact, most trading products spend about 70% of the trading hours within a range. While trading trends and joining them is easy and straightforward when they are established, most traders miss the obvious and other market structure that dominates trading. In this article, we will dig deeper into the dynamics of ranges, how to trade them and what to do when a breakout occurs. This strategy can be profitable in stable and sideways markets – even compared to realistic swing trading returns. In these conditions, stocks tend to fluctuate within a predictable range, making it easier for traders to identify buy and sell points.

Technical indicators like Bollinger Bands, Moving Averages, or the Relative Strength Index (RSI) are useful indicators to confirm entry and exit points within the range. This strategy operates under the assumption that the asset’s value will continue to fluctuate within the identified range, offering you multiple opportunities to enter and exit positions. Likewise, it is best not to try to trade back towards the range after a breakout. With well-established ranges, several retests of the boundary are common before a full breakout. These kinds of ranges usually mark a correction against the predominant trend. For the reasons above, depending on the range slope and the currency pair, some traders prefer to trade one direction or another, rather than trading both ways.

RSI (Relative Strength Index) Based Strategy

While there are different names for each chart pattern, I keep it simple and if the market is not in a trending state, I call it simply a range-bound market. This type of expanding range is different than the broadening formation where markets will make, for example, a high, a lower low, and then hit a higher high. When range trading, the shape of the consolidation can vary and make going long or short more difficult. When a market is trending, you will see a stair-stepping pattern of higher highs and higher lows in the case of an uptrend. There is an imbalance of buyers and sellers and you can generally see the difference between an impulse move and a corrective move.

Final Thoughts on the Best Range Trading Strategy

To initiate the trade, place a buy order at a price close to that of the support, the lowest price at which the asset trades. Then, place a sell limit order at a price that corresponds to the resistance, or the upper limit of the asset’s price range. Range trading also requires a higher volume of trades, since it is a short-term form of investment.

Is range trading a good strategy to use?

For others, a ranging market is gold – a perfect trading mode with a low-risk and simple way to trade the markets. On the other hand, trend trading focuses on capitalizing on directional price movements by identifying and riding market trends. The primary goal of range trading is to buy an asset at the lower end of the established range and sell it at the upper end, profiting from these predictable price movements.

More Tips on Perfecting Your Range Trading Strategy

So, if you want a more aggressive approach to trading a ranging market, you can wait for the breakout. In a triangular-ranging market, the price moves between two converging levels of support and resistance. This creates a triangular pattern on the chart, with the price bouncing back and forth between the two levels. Horizontal range is the most common type of ranging market, where the price moves between two levels of support and resistance that are more or less parallel to each other. The upper level is known as price resistance, while the lower level is known as support. For example, a trader could enter a long position when the price of a stock is trading at support, and the RSI gives an oversold reading below 30.

This is a stock market strategy where traders leverage the repetitive oscillation of a stock’s price between two consistent levels. We’ll explain it in greater detail below before comparing and contrasting it against other strategies. Trading with range bars works the best when we have time periods of congestions or price consolidation zones. Using range bars we eliminate a lot of the day to day market noise by smoothing the price action. In 1995, Vicente M. Nicolellis Jr., a trader from Brazil, developed an innovative technique of charting price bars.

Such discipline, coupled with a robust log of trades, paves the way for continual strategy enhancement and, ultimately, steady performance in the often unpredictable markets. Thus, range trading stands as a testament to the power of a methodical and analytical approach to the markets. Range trading necessitates strict adherence to established rules, challenging traders to overcome instinctual responses.

Trade the Breakout – Enter a Position When the Price Breaks The Range Area

As mentioned, a ranging market occurs when the price of a particular asset remains in a narrow range for an extended time. However, to range trade, you must first identify a sideways market with clear support and resistance levels. First, let’s define what we mean by a range market, also known as a range-bound market. A ranging market is a market condition in which the price of an asset trades within a relatively narrow range without showing any clear direction or trend. In other words, the price is bouncing back and forth between two levels of support and resistance without breaking out of that range.

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