Range trading: What Is Range-Bound Trading? Definition and How Strategy Works
Day traders frequently use the trading range of the first half-hour of the trading session as a reference point for their intraday strategies. For example, a trader might buy a stock if it breaks above its opening trading range. When a stock breaks through or falls below its trading range, it usually means there is momentum building.
This investment strategy based on the trading range uses what’s known as technical analysis. Ranging markets have stable, predictable price action, and you are required to buy at support and sell at resistance. The straight lines represent the trading range and provide the trader with the support and resistance zones needed to provide entry points and areas for stop losses and limit orders.
A stop-loss order could sit at the opposite side of the trading range to protect against a failed breakout. 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.
To complete the trade, you would consider placing an order near a price level that you’ve identified as a resistance price level. These support and resistance levels may be a moving average or some other price level that you’ve identified as significant. Given that range trading entails market timing, which is exceedingly difficult, you might consider placing a stop limit order to sell at some percentage below the price that you bought at . Stocks and other investments can vacillate between trending (i.e., going up or going down) or non-trending (i.e., moving sideways).
Therefore, it is vital to identify and exploit lucrative opportunities in range-bound markets. Browse through the comprehensive AvaTrade education centre and learn about the best way to identify different market conditions and how to take advantage of opportunities in them effectively. You can open a free trading account when you are ready to test your favourite trading strategies. Range trading strategies help investors exploit lucrative opportunities when there is sideways price action in the market. Markets oscillate between trends and ranges, and it is essential to have effective strategies to take advantage of trading opportunities during different market conditions.
Find the approximate amount of currency units to buy or sell so you can control your maximum risk per position. The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The information in this site does not contain investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument. The similar growth rates shared by the European Union and Switzerland pretty much keep the exchange rate of the EUR/CHF stable.
If you fully understand the risks of range trading, you would first want to determine whether the market is trending or not, with a time frame that aligns with your strategy. However, if the stock or other investment appears to trend in a particular direction, that would likely negate the value of a range trading strategy. Because range trading involves identifying significant price levels, some of the technical analysis strategies used with range trading include support and resistance, volume trends, and moving averages. Applicable to all Markets – All markets tend to have periods where prices range.
It is, therefore, important to determine the ideal places to put in place stop losses that will help limit your losses in case a price breakout occurs. The idea in a range-bound market is to identify support and resistance levels, from which prices bounce back and forth. When the price is at or near support levels, the principle is to look for opportunities to place buy orders. When buy orders are placed, resistance levels serve as optimal price target areas.
Trading a range can just utilise support and resistance levels, but it can also involve the use of indicators. 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. 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. Breakouts happen when prices advance strongly outside the defined support and resistance levels and consequently when resuming an old trend or establishing a new one.
Understanding Trading Ranges
Determine significant support and resistance levels with the help of pivot points. Of course, there is always the possibility that a breakout will be a ‘false’ one, and that the price moves back into the pre-existing range. As with all things in markets, without the aid of a crystal ball it is impossible to know when a breakout will continue or whether it will revert.
Resistance is a price level at which supply may be strong enough to help prevent a stock or other investment from moving higher. The rationale is that as the price rises and approaches resistance, sellers become more inclined to sell and buyers become less willing to buy. In a range trading strategy, you typically buy at support and sell at resistance. A trading range occurs when a market moves consistently between two prices or levels for a definitive period of time. Like trend following, which can be used on any time frame, range trading can be seen in all time frames, from short-term five-minute charts to long-term daily and monthly charts. If you think you’ve identified a range bound trade, you might consider placing a buy order close to a price level that you’ve identified as a support price.
What is a Range-Bound Market?
For example, a stock is trading at $35 and you believe it is going to rise to $40, then trade in a range between $35 and $40 over the next several weeks. You might attempt to range trade it by purchasing the stock at $35, then selling if it rises to $40. You’d repeat this process until you think the stock will no longer trade in this range.
Nonetheless, range trading strategies are not ideal for all market conditions or even in all ranging markets. In a trending market, traders apply trend trading strategies to capture profits when the price advances in a single direction. The principle of range trading sees prices hit a zone of support and areas of resistance. Thus prices will not usually exactly respect these areas; trading ranges tend to attract plenty of traders, and thus volatility could increase.
Range Trading with Volatility Indicators
Unlike trend following, range trading sees traders going both long and short depending on the position of the price within the range. Usually in trend following traders will go with the overall direction of the trend, and buy dips in a rising trend and sell rallies in a falling one. Trying to time the market based on the trading range for a certain period is a risky strategy that could incur losses you may not otherwise experience through long-term investing. Price will never be contained within a range forever- it will eventually break out. Breakouts are generally strong and can lead to severe capital losses for range traders, especially if they do not use stop losses. There are also envelope-type volatility indicators such as Bollinger Bands and Keltner Channel computed to ‘contain’ price.
In a ranging market, prices bounce off defined support and resistance levels, creating multiple buy and sell opportunities for traders. Range trading strategies help traders identify valid range bound markets and optimal price entry and exit levels that offer attractive risk/reward propositions. Range-bound trading is a trading strategy that seeks to identify and capitalize on securities, like stocks, trading in price channels.
A trading range is determined by the high and low prices of a security, which fluctuate based on what investors are willing to buy and sell for. There are no guarantees that a trading range can reveal what will happen next, but some investors do look at trading ranges to help inform what they think is the right investment decision. A trading range is the range between the high and low price of a security within a given period. A stock, for example, will generally have a trading range on any given day that marks the difference between the highest price the stock traded for and the lowest price it traded for. Range trading is straightforward- you need to buy at support and sell at resistance. Range trading allows traders to take advantage of these non-trending markets.
Since pricevolatilityis seen as equivalent to risk, a security’s trading range is a good indicator of relative riskiness. After a company announces a strong earnings report, for example, investors might rush to buy that company’s stock, causing the stock to reach a high for, say, the month. Yet in the following days, after the earnings excitement dies down, demand might not be strong enough to support this high price, so the stock starts to trade a bit lower. For the next few weeks, the stock might trade within a range of this high point and its low point from the previous month. Volatility indicators will also ‘notify’ traders when a valid breakout happens in the market.
We’re also a community of traders that support each other on our daily trading journey. The basic idea of a range-bound strategy is that a currency pair has a high and low price that it normally trades between. Generally, range trading environments will contain somewhat narrow bands compared to wide bands and form horizontally.
You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money. We look at range trading, and how it can be used to provide opportunities for the times when a market is not displaying a clear trend in any one direction. Traders place stop-loss points just above the upper and lower trendlines to avoid having heavy losses from high-volume breakouts.
Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. Usually, a price must recover from a support area at least twice and also move back from a resistance zone at least twice. Otherwise, the price may simply be establishing a higher low and higher high in an uptrend or a lower high and lower low in a downtrend.
