Range trading is an online trading strategy that involves buying and selling an asset within a defined price range. It is also referred to as “boundary trading” or “range-bound trading.” The goal of range trading strategy is to profit from the fluctuation of the price of an asset within a specific range, rather than trying to predict the direction of the trend.
Explore the world of range trading strategies and learn how to identify, enter, and exit trades within a defined price range. Discover key tools and indicators, as well as techniques for managing risk. Boost your trading success with our expert guide to range trading.
Table of Contents
Range trading differs from other popular trading strategies such as trend trading and breakout trading. Trend traders try to profit from the direction of the asset’s price movement, while breakout traders look to profit from a sudden and significant move outside of a previous range. Range traders, on the other hand, focus solely on the price range within which the asset is trading.
Trading tips for Identifying a Range
One of the most important aspects of range trading is being able to identify a range on a chart. A range can be identified by looking for a period of time in which the price of an asset moves between two clearly defined levels of support and resistance. These levels are determined by the highest and lowest prices that an asset has traded at during a given period of time.
There are several factors that can influence the formation of a range. Some of the most common include market sentiment, economic data, and technical indicators. For example, if the market is bullish, it is more likely that an asset’s price will remain within a defined range, whereas if the market is bearish, the price may be more volatile and move outside of the range.
Tools and indicators that can be used to identify a range include the Bollinger Bands, Moving Averages, and the Relative Strength Index (RSI). The Bollinger Bands consist of a moving average and two standard deviation lines that are plotted above and below the moving average, forming a range. Moving Averages are commonly used to identify trends, but can also be used to identify support and resistance levels. The RSI is a momentum indicator that compares the magnitude of recent gains to recent losses, it is used to identify overbought and oversold conditions, which can be used to identify potential turning points in a range.
Entering and Exiting a Trade Range
Once a range has been identified, a trader can look for opportunities to enter a trade. One technique for entering a trade within a range is to wait for the price to reach a level of support or resistance and then enter a trade in the opposite direction. For example, if the price reaches a level of resistance, the trader may enter a short trade with the expectation that the price will fall.
Criteria for exiting a trade will vary depending on the individual trader’s risk tolerance and trading strategy. One popular exit strategy is to use a trailing stop loss, which allows the trader to lock in profits while also limiting potential losses. Another strategy is to use profit targets, where the trader sets a specific price level at which they will exit the trade in order to take profit.
Managing risk when range trading is crucial, as it involves holding a position for an extended period of time. One way to manage risk is to set a stop loss at a level beyond the range, so that if the price does move outside of the range, the trade will be closed automatically to limit losses. Another way to manage risk is to use proper position sizing based on your risk appetite. If a trader only wants to risk 1% of their account per trade, the position size for a trade would be adjusted accordingly to account for the volatility and risk of the asset.
Benefits of Range Trading
Range trading offers many advantages to traders, including:
Reduced risk of losses – Range trading helps traders reduce their risk of losses by limiting the amount of capital they can risk in any one trade. By trading within a range, traders limit the amount of money they can lose if the price of the asset moves against them.
Increased profits – By trading within a range, traders are more likely to make a profit. Range trading also gives traders more opportunities to enter and exit trades, increasing the potential for profits.
Flexibility – Range trading offers traders the flexibility to adjust their strategies to suit different market conditions. This is especially useful when markets are volatile, as range trading allows traders to adjust the range accordingly.
Range Trading Strategies
Traders use a variety of range trading strategies to take advantage of price fluctuations in the market. Some of the most popular range trading strategies include:
Breakout trading – This strategy involves entering a trade when the price breaks out of the range. If the price breaks out to the upside, traders can enter a long position and if the price breaks out to the downside, traders can enter a short position.
Retracement trading – This strategy involves entering a trade when the price retraces within the range. Traders can buy when the price retraces to the lower end of the range and sell when the price retraces to the upper end of the range.
Reversal trading – This strategy involves entering a trade when the price reverses direction within the range. Traders can buy when the price reverses to the upside and sell when the price reverses to the downside.
Range Trading with Support and Resistance – This strategy involves buying or selling when the price reaches a key level of support or resistance. Traders can look for price action signals such as pin bars, inside bars, and false breakouts to help identify potential entry points.
Range Trading with Indicators – Traders can use technical indicators such as moving averages, Bollinger Bands, RSI, Stochastic Oscillator, MACD, and Fibonacci Retracement to help identify potential entry and exit points.
Money Management in Range Trading Strategy:
Money management is an essential part of range trading, as it can help traders maximize their profits and minimize their losses. Money management involves setting a trading size, setting a stop loss, and setting a take profit order. Here are some tips for effective money management in range trading:
• Set a Trading Size – When trading in a range, traders should set a maximum trading size that they are comfortable with. This will ensure that they do not risk too much on any single trade.
• Set a Stop Loss Order – A stop loss order is an order to close a position when the price reaches a certain level. Traders should set a stop loss order at the upper and lower end of the range in order to limit their losses if the price moves against them.
• Set a Take Profit Order – A take profit order is an order to close a position when the price reaches a certain level. Traders should set a take profit order at the upper and lower end of the range in order to maximize their gains if the price moves in their favour.
• Cut Losses Early – It is important to cut losses quickly if the market moves against your position.
Indicators Used in Ranges Trading:
In order to identify potential trading opportunities, traders use a variety of technical indicators to help them decide when to enter and exit a trade. These indicators include:
| Indicator | Description |
|---|---|
| Bollinger Bands | Consist of a moving average and two standard deviation lines that are plotted above and below the moving average, forming a range |
| Moving Averages | Commonly used to identify trends, but can also be used to identify support and resistance levels |
| Relative Strength Index (RSI) | A momentum indicator that compares the magnitude of recent gains to recent losses, used to identify overbought and oversold conditions and potential turning points in a range |
| Stochastic Oscillator | Indicator that compares an asset’s closing price to its price range over a given period of time, used to identify overbought and oversold conditions. |
| Moving Average Convergence/Divergence (MACD) | Indicator that uses moving averages to identify trend and momentum |
| Fibonacci retracements | Technical analysis tool that uses horizontal lines to indicate areas of support and resistance at the key Fibonacci levels before the price continues to move in the original direction |
- Moving Average – The moving average helps traders identify trends and support and resistance levels. The most commonly used moving averages are the simple moving average (SMA) and the exponential moving average (EMA).
- Bollinger Bands – Bollinger Bands are a type of technical indicator that show the volatility in the market by plotting two standard deviations away from a simple moving average. The bands will expand when the market is volatile and contract when the market is not.
- Relative Strength Index (RSI) – The RSI is a momentum indicator that measures the magnitude of recent price changes and compares it to the magnitude of past price changes. It helps traders identify overbought and oversold conditions.
- Stochastic Oscillator – The Stochastic Oscillator is a momentum indicator that measures the location of the closing price relative to the range of the recent price action. It helps traders identify overbought and oversold conditions.
Other indicators used in range trading include Average Directional Index (ADX), Ichimoku Cloud, and Fibonacci Retracement.
Moving Average Convergence/Divergence (MACD) is a popular trend-following indicator that helps traders identify potential entry and exit points. The Average Directional Index (ADX) is a technical indicator that measures the strength of a trend. The Ichimoku Cloud is a technical indicator that helps traders identify potential support and resistance levels.
Finally, Fibonacci Retracement is a technical indicator that helps traders identify potential support and resistance levels based on Fibonacci ratios. By using a combination of these indicators, traders can get a better understanding of the market and develop more successful trading strategies.
Is Range trading applicable to CFDs?
Yes, range trading is applicable to Contracts for Difference (CFDs) just as it is to other types of financial instruments such as stocks, currency pairs, commodities and more. A CFD is a contract between a trader and a broker, where the trader can speculate on the price movements of a financial instrument without actually owning the underlying asset.
This makes CFDs well suited for range trading as a strategy because it allows a trader to benefit from price movements without the need for a long-term investment in the underlying asset. Best CFD brokers generally provide traders with the ability to trade a wide range of markets and financial instruments, with a high degree of flexibility, including the ability to trade on margin, which is an important factor for range trading strategies.
When using range trading strategy, the trader will identify the range of prices and then buy the asset when it hits the bottom of the range, and sell when it hits the top of the range. The same applies with CFDs, where the trader can go long if the price is low and short if the price is high, based on the range identified.
Risk Management in trading range strategies:
To increase the success of a range trading strategy, it is important to have a well-defined risk management plan in place. This plan should include setting stop loss and take profit orders, diversifying risk, and hedging. Additionally, traders should use the appropriate indicators to identify potential trading opportunities, and use the appropriate risk management techniques to ensure that their trades are successful. By following a well-defined risk management plan, traders can increase their chances of succeeding in range trading and reach their financial goals.
Risk management is an essential part of range trading. It is important to understand the risks associated with range trading and use the appropriate risk management techniques to minimize losses and maximize gains. Some of the most important risk management techniques include:
Set a Maximum Risk Amount – Traders should set a maximum amount of risk they are willing to take on any single trade. This will help to ensure that losses are kept to a minimum if the market moves against them.
Diversify Your Risk – Diversifying risk is an important part of risk management in range trading. Traders should look to spread their risk across multiple trades and multiple markets in order to reduce their overall exposure to risk.
Setting Stop Loss Orders – A stop loss order is an order to close a position when the price reaches a certain level. Traders can set a stop loss order at the upper and lower end of the range in order to limit their losses if the price moves against them.
Setting Take Profit Orders – A take profit order is an order to close a position when the price reaches a certain level. Traders can set a take profit order at the upper and lower end of the range in order to maximize their gains if the price moves in their favour.
Diversifying Risk – Diversifying risk is a strategy to spread out risk across multiple positions. This allows traders to reduce the overall risk of their entire portfolio.
Hedging – Hedging is a strategy to reduce risk by taking offsetting positions. For example, if a trader is long on a stock, they can hedge their position by taking a short position on the asset.
Advanced Strategies For Range Trading Markets:
Range trading is a popular trading strategy that can be used to profit from the fluctuation of the price of an asset within a specific range. While basic range trading strategies involve buying and selling an asset within a defined price range, there are several advanced strategies that can be used to increase the chances of success.
Breakout trading:
Breakout trading is a range trading strategy that involves taking advantage of the price breaking out of a defined range. When the price of an asset breaks out of a range, it often indicates a change in market sentiment or a significant event that could result in a strong price movement. To implement this strategy, traders will wait for the price to approach a level of resistance or support, and then enter a trade in the direction of the breakout. For example, if the price breaks out of a defined range to the upside, a trader may enter a long trade with the expectation that the price will continue to rise.
Mean reversion:
Mean reversion is a range trading strategy that is based on the idea that the price of an asset will eventually revert to its mean or average price. This strategy involves identifying the mean price of an asset and entering a trade when the price moves significantly away from it. For example, if the average price of a stock over the past year is $50, a trader may enter a long trade when the price falls to $40 and a short trade when the price rises to $60.
Combining range trading with other strategies:
Combining range trading with other strategies, such as trend trading or breakout trading, can also be a successful way to increase the chances of success. For example, a trader may use a range trading strategy to identify a range and then use a trend trading strategy to enter a trade in the direction of the trend within that range. Another option is to use breakout trading to enter a trade, but use range trading to set stop-loss and profit-taking levels.
Additional Resources
To further improve the knowledge and skills about range trading, there are several books and articles that can be used as a reference. Here are some popular books that can be found on Goodreads, providing a deeper insight into the strategies and techniques for range trading:
A. Books
- “Range Trading: The Simple Strategy for Consistent Profits” by Phil Newton
- “The Complete Guide to Market Breadth Indicators” by Gregory Morris
- “Technical Analysis Using Multiple Timeframes” by Brian Shannon
B. Software and Tools There are various software and tools available in the market that can assist traders in range trading, such as trading platforms and charting software. Some popular ones are TradingView, Metatrader, and Thinkorswim.
Case Studies
A. Real-world examples of range trading in action One example of range trading in action is the trade in the EUR/USD currency pair. In this case, the price of the EUR/USD remained in a defined range for several months, allowing traders to enter long trades at the bottom of the range and short trades at the top of the range. As a result, traders were able to profit from the price fluctuations within the range.
B. Analysis of the results of these trades The trade in the EUR/USD currency pair resulted in a net profit for traders who were able to enter and exit trades at the appropriate levels within the range. The key to this trade’s success was the ability to identify the range and enter trades at the appropriate levels.