Trading within a narrow range can be profitable as well. Trading in a range is a different strategy than trading in a trend. The market tends to range more than 70% of the time, which is why having a range trading strategy is critical.
You can increase your chances of success and maximise your profits by understanding the dynamics of range trading. In this guide, we’ll go over the fundamentals of range trading, including the key factors that drive range trading and the various strategies you can employ to capitalise on range trading opportunities. With the right approach and tools, you can quickly become a successful range trader.
What is range trading?
A trading range occurs when a security trades for an extended period of time between consistent high and low prices.
A price range is defined by two extremes, such as high and low prices. A price range between a security’s open and close prices from a single trading session can also be expressed as a range.
Trading in the range, and trading the consolidation are all terms used to describe range trading.
A range can be very narrow (for example, between $90.50 and $90.55), or it can be much wider, including an entire trading band (for example, between $90.50 and $91.50). The price range can be expressed as a percentage depending on the asset being traded.
A trend usually follows a trading range. If you are unsure about this, you can look into market structure theory. When a range is broken, it tends to trend in either the same or opposite direction.
Different strategies for trading
The most important aspect of range trading is that the price range must be clearly defined and rigid. It is critical to plan your entry and exit points ahead of time so that you can execute your trade quickly and decisively.
When trading ranges, it is critical to keep track of whether the asset closed within or outside of the price range. If it closed within the price range, the asset is likely to remain within that range in the near term. If it closed outside of the price range, it could indicate a change in trend and/or the end of the range.
A range market can be traded in several ways.
We can trade reversals within a range or breakouts from a range.
As shown above in the diagram, you can trade after two or three reversal points form support and resistance. Then, after the fourth reversal point, you can enter a trade.
Alternatively, you can trade the breakout of a range. You can enter the breakout after a pullback. A breakout is defined as a strong price movement in one direction that breaks out of the range and continues in that direction. Breakouts are one of the most common indicators of a trend change.
Patterns within a range
Sometimes, a pattern breakout occurs within the range. Patterns like triangle, trendline, double bottom etc are formed within a range. You can trade the breakouts of such patterns.
Chart patterns are recurring price movements that can be seen on charts that represent the price of a security or asset. While they cannot be used as a trading signal in and of themselves, they can be used to confirm other indicators.
There are numerous chart patterns that can be used to trade ranges. Among the most common patterns are: –
Ascending triangle pattern: An ascending triangle pattern is an upward-sloping triangle pattern that can be found above a downtrend. It is a bullish signal indicating that the asset is about to rise. When the price breaks above the upward-sloping trendline connecting the two trendline breakpoints, a trader could place a buy order.
Descending triangle pattern: A downward-sloping triangle pattern found beneath an uptrend. It is a bearish signal indicating that the asset is about to fall in value. When the price falls below the downward-sloping trendline that connects the two trendline breakpoints, a trader could place a sell order.
Pennant pattern: A symmetrical flag pattern that can appear in both uptrends and downtrends. It is a bullish signal indicating that the asset is about to break above the trendline connecting the two breakpoints of the trendline. When the price breaks above the trendline that connects the two trendline breakpoints, a trader could place a buy order.
Flag pattern: A symmetrical triangle pattern that can appear in both uptrends and downtrends. It is a bearish signal indicating that the asset is about to break below the trendline connecting the two breakpoints of the trendline. When the price breaks below the trendline that connects the two trendline breakpoints, a trader could place a sell order.
Indicators like Bollinger bands and stochastics are used to trade ranges.
Bollinger bands is the best range indicator based on two standard deviations above and below a 20-day moving average. When the price is above the moving average but below the upper band, it may indicate an uptrend and may be a good time to enter the range long. When the price is below the moving average but above the lower band, it may indicate a downtrend and a good time to exit the range with a short position.
Timing your trades within a range
It is critical to understand when to enter and exit a trade. To put it another way, you must be able to time your trades both within and outside of the range.
When the price has already broken above the upper extreme of the range and appears ready to continue in that direction, it is the best time to enter the range.
When it comes to exiting the range, it is best to do so as soon as the price breaks below the range’s lower extreme. To avoid being trapped, you want to exit the range as quickly as possible.
Setting stops and limits in range trading
Stops and limits are frequently used by traders to manage risk and increase their chances of success.
A stop order is an order placed with your broker that immediately exits a trade if the price falls to a certain level.
When you buy a stock and want to protect yourself against a potential downturn, you use a sell stop order. When you are selling a stock and want to protect yourself from potential upside, you use a buy stop order.
A limit order is an order that you place with your broker to buy or sell a stock at a specific price. Although it is not as precise as other order types, it allows you to have more control over your trades and be more precise with your timing.