The range trading strategy requires more focus than flashy day trading or swing trading.
However, it’s a legitimate strategy for spotting assets that move in a predictable pattern between predefined price levels.
A trading range happens when an asset’s price stays within a specific area, defined mainly by support and resistance levels on a price chart.
That means the price isn’t showing a clear trend and tends to move sideways rather than making major upward or downward movements.
Of course, there’s more to it, so let’s unpack this strategy.
What is range trading?
Range trading is a strategy based on identifying optimal entry and exit points within these consolidating markets for trading between two established lines of support and resistance.
You can use this strategy on different time frames, from short-term charts like five-minute intervals to long-term daily and weekly charts.
Range trading is popular among traders because it doesn’t usually require using complex mathematical analysis indicators, such as moving averages, stochastic RSI, MACD oscillators, and others in their traditional manner.
Besides, the strategy isn’t overly complicated, so you can try it on the OctaTrader platform. For beginners, using the demo account is a smart, risk-free way to practice. Plus, if necessary, you’ll find many educational resources there to guide you.
The basics: price levels
Support and resistance levels form boundaries of a trading range:
- support is a price level where an asset usually struggles to fall below
- resistance is a price level that an asset usually struggles to rise above.
In a range-bound market, the goal is to identify these levels. When the price is near support, traders look for buy opportunities, expecting a bounce. On the other hand, when the price is near resistance, traders look for sell opportunities, anticipating a pullback. Support levels are ideal for placing buy orders, and resistance levels are ideal for placing sell orders.
You can determine support and resistance levels using graphical analysis and identifying maximum and minimum prices on a chart. To do this, you need to draw horizontal lines across significant peaks and troughs on a price chart, which will provide clear visual reference points.
There are other methods to identify price levels apart from just looking at historical movements:
Volume analysis
Volume analysis helps you determine price levels based on trading activity, particularly concentrations of transactions at specific prices that form the price ranges traders use.
High trading volumes at specific prices indicate higher interest or activity, which can form support and resistance levels or define trading ranges. Traders use this information to make decisions based on the strength of buying or selling pressure at various price levels.
Candlestick patterns analysis using price action
Traders look at how candlesticks behave near support and resistance levels to gauge market sentiment and potential price reversals.
For instance, if a bullish candlestick forms near a resistance level in a range-bound market, it suggests a possible rebound that indicates a potential buying interest. Conversely, a bearish candlestick near a resistance level indicates higher selling pressure and a potential breakdown.
Technical indicators
Bollinger Bands are particularly well-suited for this strategy as they help identify overbought and oversold conditions within a range. Traders watch how prices interact with these bands to decide when to buy near the lower and sell near the upper bands.
You can also use the Relative Strength Index (RSI), a momentum oscillator. In range trading, RSI helps identify overbought and oversold conditions and guides entry and exit points. However, traders should wait for the RSI to cross back beyond the 70 and 30 levels to avoid trading during prolonged overbought or oversold periods in trending markets.
You can consider using indicators like Stochastics, MACD, CCI, or ADX, but remember that each has strengths and weaknesses. If you rely on them blindly without proper analysis, you might end up with losses.
Practical range trading tips and strategies
Range trading is most effective during periods of low volatility when prices move sideways. These quieter market times called ‘fishing’ times, can offer stable conditions for trading within a range. For example, mid-session hours between London’s morning and New York’s sessions in the Forex market see reduced volatility.
EUR/CHF and USD/JPY are popular choices when choosing the appropriate asset. They tend to have stable economic policies and trade within established ranges. Other things to keep in mind:
- During the Asian trading session, the market is quite predictable when the main banking centres of Europe and America are closed (and the investment banks are inactive). This allows you to practice range-bound trading with a higher probability of success.
- Trading in the calm Asian session is followed by another interesting one, called the ‘London Explosion.’ This occurs at the beginning of the European trading session when massive liquidity pours into the market. Quite often, we can see on the chart how the price (like an explosion) leaves the price range formed in the previous trading session.
Certain stocks also exhibit range-bound behaviour, driven by steady business performance without significant fluctuations. On the other hand, commodities are generally more volatile. They may only be ideal for range trading if market conditions are balanced and stable.
News and economic events are essential factors in range trading as they have the potential to disrupt established trading ranges. Unexpected events like interest rate adjustments can cause currency pairs to break out of their trading ranges. So, keep track of the economic calendar to prepare for and adapt to these disruptions.
Pros and cons of range trading
Like any strategy, there are positives and negatives to consider. It’s up to you to weigh these factors and determine which ones outweigh the others:
Conclusion
Mastering range trading is useful because markets don’t always trend—trends are actually pretty uncommon. Range trading lets traders capitalise on these non-trending markets.
It’s important to remember that trying to predict when a range starts or finishes isn’t realistic. Traders should avoid attempting to anticipate the market and instead wait until the range is clearly established before making any trading decisions.
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