The Range Trading Strategy Guide
Many of you will have heard the popular trading adage ‘the trend is your friend’ and, indeed, many traders spend a great deal of time analysing price charts, searching for a trend to ride their way to profit. However, markets do not always follow a clear trend and spend a lot of time moving sideways, or ranging, and, sometimes, these lateral movements can provide the basis for 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 market 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 a security’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 traders utilise both long and short positions, buying when the security is approaching its support level and selling when it approaches its resistance.
How to Create a Range Trading Strategy
Many traders exploit range-bound Forex 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 trading, so how can we use these to our advantage to create a range trading strategy?
A successful range trading strategy requires a range-bound market - therefore, unsurprisingly - our first step is to identify a trading range. 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. Bear in mind that these highs and lows that make up the areas of support and resistance will not always - and, in fact, are unlikely to - be exactly the same, but they must be close together.
Depicted: Admirals (Formerly Admiral Markets) MetaTrader 5 - GBPJPY M5 Chart. Date Range: 27 April 2021 - 28 April 2021. Date Captured: 12 May 2021. Past performance is not a reliable indicator of future performance.
There are no hard and fast rules about how many times the price needs to move between the same support and resistance levels before constituting a trading range, it is really a matter of preference and may differ from trader to trader. The more risk averse may be inclined to wait until the price has bounced more than twice between the two areas.
Whichever way a trader may choose to identify a trading range, the important thing is that, once identified, they can look to enter market positions in an attempt to exploit this range.
Positions can be entered manually, which is possibly more suitable for those trading on shorter time frames, or a trader can use limit orders to automatically enter the market once the price has reached the support or resistance level.
Range Trading Indicators
In the previous section we outlined the foundations of a basic range trading strategy, whereby a trader buys and sells based only on the determined areas of support and resistance.
A trader may also choose to utilise 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 a successful range trading strategy.
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.
Depicted: Admirals Metatrader 5 - USDCAD M5 Chart. Date Range: 10 May 2021 - 11 May 2021. Date Captured: 12 May 2021. Past performance is not a reliable indicator of future performance.
In the chart above, we can see the USDCAD currency pair caught in a range-bound market, with the %R indicator underneath. As we can see, on the three occasions where the price reached either its support or resistance levels, the %R was in oversold and overbought regions, thus 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.
Mastering range trading strategies allows a trader to attempt to profit in times when the market shows no clear trend.
Of course, trading ranges will not last forever and, therefore, a trader should always use a stop loss when range 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 Admirals might be the best place for you! A demo trading account allows you to trade using virtual currency in real-market conditions, making it an ideal place to practice before heading to the live markets! Click the banner below in order to register for an account today:
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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.