Range-bound trading is a trading strategy that seeks to identify and capitalize on securities, like stocks, trading in price channels. After finding major support and resistance levelsand connecting them with horizontal trendlines,a trader can buy a securityat the lower trendline support (bottom of the channel) and sellit atthe upper trendline resistance(top of the channel).
Key Takeaways
A range-bound trading strategy refers to a method in which traders buy at the support trendline and sell at the resistance trendline level for a given stock or option.
Traders place stop-loss points just above the upper and lower trendlines to avoid having heavy losses from high-volume breakouts.
Typically, traders use range-bound trading in conjunction with other indicators, such as volume, in order to increase their odds of success.
Range-bound trading strategies involve connecting reaction highs and lows with horizontal trendlines to identifyareas of support and resistance. The strength, or reliability, of the trendline as an area of support or resistance depends on the number of times the price has reacted to it. For example, if the price has moved lower off of the resistance trendline five or four times, it's considered more reliable than if the price only moved off of it two times.
A trading range occurs when a security trades between consistent high and low prices for a period of time. The top of a security’s trading range often provides priceresistance, while the bottom of the trading range typically offers price support.
Traders capitalize on range-bound trading by repeatedly buying at the support trendline and selling at the resistance trendline until the security breaks out from a price channel. The idea is that the price is more likely to rebound from these levels than break through them, which puts the risk-to-reward ratio in their favor, although it's important to always watch for a potential breakout or breakdown.
Most traders place stop-loss points just above the upper and lower trendlines to mitigate the risk of heavy losses from a high volumebreakout or breakdown. For example, if a security has a lower support trendline at $10.00 and an upper resistance trendline at $15.00, the trader may purchase the stock at $11.00, just after a rebound, with a stop-loss of $9.00. This protects the trader if the stock broke down from the support trendline.
Many traders also use other forms of technical analysis in conjunction with price channels to increase their odds of success. For instance, traders might watch the volume associated with a rebound from a support level to gauge the likelihood of a breakdown or breakout. The relative strength index (RSI) is also a useful indicator of the trend strength at any given point within a price channel.
Range-Bound Trading Example
The following chart shows an example of a range-bound trading strategy with arrows in place for potentially long and short trades.
In this chart, a trader may have noticed that the stock was starting to form a price channel in late October and early November. After the initial peaks were formed, the trader may have started placing long and short trades based on these trendlines, with a total of four short trades and two long trades. The stock's breakout from upper trendline resistance marks an end to the range-bound trading.
Trading Range Strategies
Support and Resistance:If a security is in a well-established trading range, traders can buy when the price approaches support and sell when it reaches resistance. Technical indicators, such as the relative strength index (RSI),stochastic oscillator, and the commodity channel index (CCI), can be used to confirm overbought and oversold conditions when price oscillates within a trading range.
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. Alternatively, the trader may decide to open a short position when the RSI moves into overbought territory above 70. A stop-loss order should be placed just outside of the trading range to minimize risk.
Breakouts and Breakdowns:Traders can enter in the direction of abreakoutor breakdown from a trading range. To confirm the move is valid, traders should use other indicators, such as volume and price action.
For instance, there should be a significant increase in volume on the initial breakout or breakdown, as well as several closes outside the trading range. Instead of chasing the price, traders may want to wait for aretracementbefore entering a trade. For example, a buy limit order could be placed just above the top of the trading range, which now acts as a support level. A stop-loss order could sit at the opposite side of the trading range to protect against a failed breakout.
A range-bound trading strategy refers to a method in which traders buy at the support trendline and sell at the resistance trendline level for a given stock or option. Traders place stop-loss points just above the upper and lower trendlines to avoid having heavy losses from high-volume breakouts.
Whenever a stock or index is trading between support and resistance, it is called range-bound. There is no strong move in either direction. Prices tend to ping back and forth near old highs and then fall to prior lows.
The rationale is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy. In a range trading strategy, you typically buy at support and sell at resistance.
Effective Strategies for Trading Range-Bound Securities
Once the range, or price channel, is established, the simplest trading strategy is to buy near the support level and sell near the resistance. Alternatively, when trading options, one could purchase calls near support, and purchase puts near resistance.
This estimation can be useful for quick calculations or for verifying the reasonableness of a given result. The range strategy is a method that allows us to estimate the result of an arithmetic operation by providing a range within which the exact result is guaranteed to be.
Range trading is a popular approach because markets often trend, or move consistently in a single direction, only a small amount of time. On the other hand, most activity takes place in a range, which emphasizes the necessity of skillfully finding opportunities during such price movements.
A good indicator of the existence (or lack of) a trend is the average directional index (ADX). ADX readings above 25 are considered to indicate the existence of a solid trend. Readings lingering below 25 can indicate a trendless market that may remain range-bound for some period of time.
Some of the best volume indicators to use when trading range-bound markets include On Balance Volume (OBV), Volume Price Trend (VPT), Money Flow Index (MFI), Accumulation/Distribution, and Negative Volume Index (NVI).
The Average True Range works by finding the True Range – the largest of the differences between the current high and the previous close, the current low and the current high and the current low for a set of time periods, adding them together, and dividing them by the number of time periods.
If you identify an upper and lower boundary of a range, this means you can avoid trades if the entry is too close to the upper boundary for a long trade and too close to the lower boundary for a short trade. To do this, you can look for the most recent support and resistance levels on the 5 minute chart.
The most successful options strategy for consistent income generation is the covered call strategy. An investor sells call options against shares of a stock already owned in their portfolio with covered calls. This allows them to collect premium income while holding the underlying investment.
Long call. In this option trading strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. ...
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. Alternatively, the trader may decide to open a short position when the RSI moves into overbought territory above 70.
Once the range is identified, the trader looks to enter positions that take advantage of the range. They can either enter positions manually, buying at support and selling at resistance, or use limit orders to enter positions in the appropriate direction once the market has reached resistance or support.
Range trading involves identifying and trading within a range of prices where the forex market has been trading, so selling high and buying low. While trend trading involves identifying and trading in the direction of the forex market's overall trend, so buying high and selling higher or selling low and buying lower.
While the breakout trader looks for a price that's confined by levels of support or resistance, and waits for it to move beyond those … the range trader plays the ping-pong game as the price bounces between key levels.
In forex, crosses are defined as currency pairs that do not have the USD as part of the pairing. The EUR/CHF is one such cross, and it has been known to be perhaps the best range-bound pair to trade.
A sideways market, sometimes called sideways drift, refers to when asset prices fluctuate within a tight range for an extended period of time without trending one way or the other. Sideways markets are typically described by regions of price support and resistance within which the price oscillates.
Address: Suite 490 606 Hammes Ferry, Carterhaven, IL 62290
Phone: +8557035444877
Job: Forward IT Agent
Hobby: Fishing, Flying, Jewelry making, Digital arts, Sand art, Parkour, tabletop games
Introduction: My name is Otha Schamberger, I am a vast, good, healthy, cheerful, energetic, gorgeous, magnificent person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
:max_bytes(150000):strip_icc()/dotdash_INV_final-Range-Bound-Trading_Feb_2021-01-8f92f4f806ea464e84c0787f363a01ec.jpg "What Is Range-Bound Trading? Definition and How Strategy Works (1)")
