Depending on the view, objectives, risk tolerance, and other factors, active investors might employ various tactics. One of these tactics is range market trading.
Range market trading exploits non-trending markets by detecting persistent high and low prices, referred to as resistance and support bands, in non-trending markets.
It entails purchasing and selling a stock tactically over a short period of time. Range market trading has dangers and restrictions that you should know before attempting it.
The concept of trading inside a limited range can be applied to a wide range of markets, including forex, stocks, and cryptocurrencies, allowing traders to buy and sell when an asset is oversold or overbought.
We’ll show you how to range trade with an example strategy that uses range bars in this article. We also discuss how expert advisor robots can help with range trading methods.
Range Trading Strategy Overview
For a certain time, range market trading is defined as the vertical price movements between a resistance ceiling and a support floor. These ranges are common in all financial markets, with the top of a security’s trading range providing price resistance and the bottom of the trading range providing price support.
Because market values frequently shift horizontally, there may be few opportunities to enter a market. Range Market trading takes advantage of the fact that markets vary within a range defined by resistance and support bands during sideways trends.
Traders can profit from the range by purchasing at the support level and selling at the resistance level until the price breaks out. Conversely, traders can profit from horizontal consolidations by selling at resistance and buying near support.
The trading range may imply a breakout trading opportunity for some traders, with a breakout above the ceiling and a collapse below the support floor.
There are many different benefits range market trading is a good strategy to workout. Some of them are given below:
- Traders can profit from periods when the markets aren’t trending.
- Range trading can be used on any market, allowing the user to trade.
- The trader has clear entry and exit locations after the specified range, making it simple to invest and stop losses.
- Smaller profits are chased over shorter durations in range market trading, which decreases the chance of the price being drastically impacted by economic news.
Range market trading comes with several risks and drawbacks as well:
- It is tough for seasoned investors to determine when a market is within a range and when it will break out.
- Range trading necessitates frequent investing, raising commission expenses, and eating into earnings.
- It can take a long time to find acceptable markets and ranges.
Range market trading carries the danger of requiring perfect market timing, which involves predicting when and for how long a stock or other investment will trade between two values. If the price of assets does not move in the way you expect throughout your time horizon, range trading might result in losses.
Range Trading vs. Trend Trading
Range Market trading is a popular day trading approach that may be applied in any timeframe from minutes to months. Traders typically use a method in which they hold long and short positions at different times, as opposed to long-term investors who hold a position that reflects the trend’s general direction.
How does Range Market Trading Work?
Any asset, including currency, equities, and cryptocurrencies, can benefit from range market trading. However, the volatility, and thus the range, is the most significant distinction between these assets.
When range market trading, more volatility products like Bitcoin carry a higher risk, but they can also generate higher gains. Currency crosses, which do not include the USD and consequently have a weaker trend, are the ideal range trading forex pairs.
For instance, EUR/CHF, because the European and Swiss economies are growing at similar rates. Even though indexes like the Nifty Bank and the S&P 500 have overall growth patterns, they can be good intraday range trading options.
Binary options can also use range-bound trading, which means the payment is either a fixed sum or nothing. Traders who use binary options guess whether the price will remain within the investment range.
How to Use Range Market Trading?
Despite the fact that the genuine range-bound definition is universally accepted, there are many technical indicators and expert adviser approaches to choose from, which might be confusing.
Here’s a step-by-step guide for using the range market trading with bars.
Suitable Range Market Identification
Traders must first discover a market that is not trending. This can be civilized by using a moving average indicator with a timescale no longer than the period under consideration.
The blue line of the 50-day moving average indicator indicates an uptrend, followed by a flatter line, indicating a sideways market appropriate for range trading.
The Average Directional Index (ADX) is a method of determining the strength of a trend without considering its direction. It is calculated on a scale of 1 to 100, with an index below 20 indicating a sideways market.
As the market flattens, the ADX drops below 20, as shown by the red line in the lower graph. Another technique to filter stocks to find suitable ones is to use online screeners.
Trading Range Area Identification
The next step is to determine the trading range. To confirm that a price is not temporarily increasing or falling as part of a longer trend, it must have recovered from the support band and declined from the resistance band at least twice.
A candlestick chart can identify range areas, but a range bar chart, which is focused on price movement rather than time, can also be used to see market volatility.
Each time the price moves within a set range, a bar is completed, and a new one is started. This means that a highly volatile market will have more bars shown.
The range market trading method reduces chart noise, especially when a price oscillates in a narrow range, which is displayed as a single bar. Support and resistance bands are highlighted, and turning points become more obvious.
Range Market Trading Execution
Range market trading may be done once the trading area has been set up by simply buying and selling when the price reaches the support and resistance bands. Stop orders should be placed at or slightly outside the trading range.
Using indicators in tandem can provide additional insights. For instance, the RSI oscillator number reveals if a stock is oversold (below 30) or overbought (above 70), indicating whether to buy or sell.
The range market trading pattern will end in most cases, and the market will break out of it. Predicting how and when this trading range breakout will occur is tough, but indicators can help.
Bollinger bands are lines drawn with two standard deviations above and below a price to show how volatile a market is. While a Bollinger band range expansion indicates a price pattern prolongation, a range contraction or narrowing generally occurs just before a breakthrough.
This method is comparable to Narrow Range (NR) bar trading, which is based on the theory that an expansion frequently follows a volatility reduction.
Range Breakout Opening
Range breakouts can be profitable, especially when the market starts, as this is typically the busiest trading phase of the day.
Traders can figure out the opening high and low range by looking at the brief period after the market begins (typically 15 or 30 minutes). Then, the trend for the remaining day is determined by the direction in which the price breaks out of this initial range.
How to do Range Market Trading with Bots?
Range market trading can be automated using algorithmic robots. For instance, the strategy bot can be set to buy when the price crosses above the support band and sell when the price passes below the resistance level.
A new sell trade can also be opened automatically at the same moment. Depending on which trading platform the investor is using, trading bots can be downloaded from various libraries.
Expert Advisors, for example, are a type of bot that may be used for range trading on MetaTrader (EA). Each provides the possibility to modify factors such as lot size, resistance, and support restrictions.
Traders can also create custom bots by writing their range trading algorithms, giving them complete control over range setup and risk management. The programming languages used to create these robots are platform-specific, with MetaTrader platforms offering MQL.
Range Market Trading Strategies
Traders use different trading strategies to gain good profits and to execute trade well with range market trading:
Support and Resistance
Traders must identify and quantify the strength of support and resistance to correctly understand price charts and trade successfully. A downturn might be paused or reversed at the support level, where buying is robust.
Support is shown by horizontal or near-horizontal lines connecting numerous bottoms. Also, a downturn might be interrupted or reversed at the resistance level, where selling is strong.
Resistance is represented by horizontal or near-horizontal lines connecting numerous tops. The strength of regions is determined by factors such as height, length, and trade volume at a certain zone.
As a result, security can be purchased in a range-bound market as the price approaches a support level or sold as the price approaches a resistance level.
Breakouts and Breakdowns
Traders may be able to enter a range-bound market by breaking out of range market trading. However, traders must double-check their entrance utilizing price and volume action indicators.
On the initial breakthrough, the volume should increase beyond the trading range. Rather than aggressively after the price, traders may want to wait for a correction before joining the market.
Reversing the Mean
A distinction that shifts toward or out from its average price over time is referred to as price behavior. The most widely utilized approach for determining the market’s average price is the moving average.
The moving average slope is essentially checked to validate the presence of a trading range. When a price rises above or below its moving average, it is more likely to revert to its average price.
The objective is to profit from the price’s propensity to return to the mean. The type of security and the industry in which it operates are two elements that influence the price of securities.
For instance, fixed-income tradable assets have a smaller trading range than commodities and equities with substantial price volatility.
Investors who want to profit from range-bound trading should look for assets with lower volatility, as more volatility signals market instability. In a range-bound market, a high price serves as a major resistance level, which can be considered a ceiling for price activity and cannot be broken.
Similarly, a low price can be regarded as a floor for price action because it functions as a key support level. Even yet, both the high and low prices can be beaten.
To employ a range-bound trading strategy, a trader must first use several technical analysis tools to detect important support and resistance levels to detect market circumstances.
What is the best way to Build up a Range Market Trading?
The goal of range trading is to profit from price movement between support and resistance levels. A trader can buy an asset near or at the overbought level and sell it near or at the oversold level after spotting favorable market conditions.
Long-term success in a trading range would necessitate a trader entering the market with a lower stop loss and a greater profit target. In a trending financial market, the method can be effective. If you believe you’ve found a range-bound trade, consider placing a buy order around a price level you’ve identified as a support level.
To complete the deal, you can consider placing an order at a price level that you’ve identified as a resistance price level. A moving average or another price level that you’ve selected as significant could serve as support and resistance.
Given the difficulty of market timing in range trading, you can try placing a stop-limit order to sell at a percentage below the price you acquired, providing you were able to purchase the stock at your intended price.
When there is no exact trend direction, range market trading is a versatile approach that may be applied to all markets. Identifying the support and resistance bands for a range can be the most difficult component, but the buying and selling positions are obvious once these have been identified.
With a legitimate brokerage firm like ABInvesting, demo accounts are a good opportunity to practice establishing range areas and anticipating breakout points.