The Range Trading Strategy Guide

You may be familiar with the popular trading adage ‘the trend is your friend’ but what about when there is no trend? Markets spend a lot of time moving sideways, or ranging, and, sometimes, these lateral movements can be used to create a successful trading strategy.

In this article, we will explain what range trading is, how to identify a range bound market and how to construct a range trading strategy.

What Is Range Trading?

The concept of trading with the trend is fairly intuitive to grasp - when the price moves in a clear direction the trader follows. When the trend comes to an end the trader exits their position, hopefully with a profit.

Range trading involves a trader attempting to profit from a range bound market, also known as a trading range. But what is a range bound market? 

A range bound market occurs when an asset’s price moves consistently between two prices for a period of time, making no upward or downward progress. The high of the range provides the price resistance, whilst the support is provided by the range’s low.

Unlike trend following, where the trader opens a position in line with the market’s trend, range bound trading involves taking both long and short positions, buying when an asset approaches its support level and selling when it approaches its resistance.

Creating a Range Trading Strategy

Range traders exploit range bound markets to attempt to profit from these periods of time where the market lacks a clear direction. We now know what a range bound market is and the basic principles of range bound trading, so how can we use these to our advantage to create a range trading strategy?

Unsurprisingly, our first step is to identify a range bound market. A trading range can occur on any financial instrument and on any time frame, meaning that range trading strategies are suitable for most trading styles.

Generally speaking, a trading range can be identified after the price has recovered two times from the same support level and two times from the same resistance level. However, there is no set rule here. The more risk averse may be inclined to wait until the price has bounced a few more times between the two areas.

Bear in mind that these highs and lows that make up the areas of support and resistance won’t always be exactly the same, but they must be close together.

Once a range has been identified, the trader can attempt to exploit it by implementing a range trading strategy; going long when the price reaches its support level and short when it reaches its level of resistance.

Range Trading Indicators

In the previous section we outlined the foundations of a basic range trading strategy, where a trader buys and sells based only on the determined areas of support and resistance.

A trader may also choose to use range trading indicators to help identify the conditions that may accompany the reversals in price at the support and resistance levels of a range.

Technical indicators such as the Relative Strength Index (RSI), Commodity Channel Index (CCI), Stochastic Oscillator and Williams Percent Range (%R) can all be used to this effect as part of successful range trading strategies.

For example, the %R indicator, which is commonly used to identify an overbought or oversold market, can be used to help filter potential trading signals. The %R indicator oscillates between 0 and -100 and, typically, a value between 0 and -20 indicates an overbought market, whilst a value between -80 and -100 indicates an oversold market.

In the chart above, we can see the AUDCAD currency pair caught in a range bound market, with the %R indicator underneath. As we can see, on the eight occasions where the price reached either its support or resistance levels, the %R was in oversold and overbought regions, providing the trader with buy and sell signals respectively.

In this manner, additional range trading indicators can be used to help filter out false trading signals. However, it must be noted that whilst technical indicators may help filter out false trading signals, they are by no means a guarantee of positive results.

Final Thoughts

Mastering range trading strategies allows a trader to attempt to profit in times when the market shows no trend.

Of course, range bound markets do not last forever and, therefore, a trader should always use a stop loss when range bound trading as part of their overall risk management plan to help protect themselves from potential breakouts.

Trade on a Risk-Free Demo Account

For those new to trading, or for experienced traders who want to try out a range trading strategy in a risk-free environment, a demo trading account from Admiral Markets could be just what you are looking for.

A demo trading account allows you to trade using virtual currency in real-market conditions, making it an ideal place to practise before heading to the live markets! Click the banner below in order to open a demo account today:

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• How to Use the Parabolic SAR Indicator

About Admiral Markets

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.