What is range trading?
When the price is moving in a discernible direction, a trader should follow it. This is the basic idea of trading with the trend. Traders go out of the market when a trend ends, with any luck making a profit.
Range trading is the practice of trying to make money in a range-bound market. So, what exactly is a market that is range-bound?
When the price of an asset fluctuates sideways, or stays within a narrow range, for an extended length of time, the market is said to be range-bound. The range’s high acts as resistance, while the low acts as support for the price.
Instead of opening a position in the direction of the market’s trend, as trend-followers do, range traders use both long and short positions, buying when the asset is nearing its support level and selling when it is nearing its resistance level.
How to create Range trading strategy
When the Forex market lacks momentum, many traders seek to benefit by trading in a narrow range. What follows is a discussion of how the concepts of a range-bound market and range trading can be put to use in practice.
Because a range trading technique can only work in a range-bound market, the first step is to, well, define a trading range. Since a trading range can exist on any financial instrument and any time frame, range trading tactics are often applicable.
If the price has bounced twice from the same support level and twice from the same resistance level, then it is likely trading within a range. Keep in mind that the highs and lows that comprise the regions of support and resistance are not required to be identical, but they must be somewhat close together.
It is a question of personal opinion and might vary from trader to trader as to how many times the price must move between the same support and resistance levels before defining a trading range. Those who are risk averse may prefer to sit on the sidelines until the price has jumped back and forth between these zones three times.
A trading range can be spotted in a number of different ways, but once found, a trader can look to enter market positions to try to take advantage of it.
Short-term traders may prefer entering positions manually, while longer-term traders can utilize limit orders to automatically enter the market if the price reaches the support or resistance level.
Range Trading Indicators
In the preceding paragraph, we laid out the rudiments of a basic range trading strategy, in which a trader makes purchases and sales based solely on previously established levels of support and resistance.
When trying to predict when prices will reverse at the range’s support and resistance levels, a trader may also make use of range trading indicators.
To this end, range traders can make use of technical indicators like the Relative Strength Index (RSI), Commodity Channel Index (CCI), Stochastic Oscillator, and Williams Percent Range (%R).
An overbought/oversold market can be identified, for instance, with the use of the %R indicator, which can then be used to filter prospective trade signals. The %R indicator ranges from 0 to -100, with values between 0 and -20 often indicating an overbought market and values between -80 and -100 indicating an oversold market.
The preceding chart shows the USDCAD currency pair trading in a tight range, with the %R indicator providing further context. As can be seen, the %R was in oversold and overbought regions, signaling buy and sell opportunities, on all three instances when the price reached its support or resistance levels.
In this way, extra range trading indicators can be employed to further eliminate unnecessary noise in the trading process. Although technical indicators can be useful for weeding out erroneous trading signals, it’s important to remember that this is in no way a guarantee of success.
Conclusion
Learning to trade in a range helps you to try to make money during periods of time when the market is showing no apparent trend.
In order to protect themselves against unanticipated price movements, traders should always employ a stop loss while range trading as part of their overall risk management strategy.
