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Range-Bound Trading

Range-Bound Trading
TradingTechnical AnalysisTechnical Analysis Basic Education

What Is Range-Bound Trading?

Range-bound trading is a trading strategy that looks to recognize and capitalize on securities, similar to stocks, trading in price channels. Subsequent to finding major support and resistance levels and interfacing them with horizontal trendlines, a trader can buy a security at the lower trendline support (lower part of the channel) and sell it at the upper trendline resistance (top of the channel).

Understanding Range-Bound Trading

Range-bound trading strategies include interfacing reaction highs and lows with horizontal trendlines to recognize areas of support and resistance. The strength, or unwavering quality, of the trendline as an area of support or resistance relies upon the number of times the price has responded to it. For instance, in the event that the price has gotten lower off of the resistance trendline five or four times, it's viewed as more dependable than if the price just moved off of it two times.

A trading range happens when a security trades between steady high and low prices for a while. The highest point of a security's trading range frequently gives price resistance, while the lower part of the trading range commonly offers price support.

Traders capitalize on range-bound trading by over and over buying at the support trendline and selling at the resistance trendline until the security breaks out from a price channel. The thought is that the price is bound to rebound from these levels than break through them, which puts the risk-to-compensate ratio in support of themselves, despite the fact that it's important to continuously look for a likely breakout or breakdown.

Most traders place stop-loss points just over the upper and lower trendlines to relieve the risk of heavy losses from a high volume breakout or breakdown. For instance, in the event that a security has a lower support trendline at $10.00 and an upper resistance trendline at $15.00, the trader might purchase the stock at $11.00, just after a rebound, with a stop-loss of $9.00. This safeguards the trader if the stock separated from the support trendline.

Numerous traders likewise utilize different forms of technical analysis related to price channels to increase their chances of accomplishment. For example, traders could watch the volume associated with a rebound from a support level to check the probability of a breakdown or breakout. The relative strength index (RSI) is likewise a valuable indicator of the trend strength at some random point inside a price channel.

Range-Bound Trading Example

The following chart shows an illustration of a range-bound trading strategy with bolts in place for possibly long and short trades.

In this chart, a trader might have seen that the stock was starting to form a price channel in late October and early November. After the initial peaks were formed, the trader might have begun putting long and short trades in light of these trendlines, with a total of four short trades and two long trades. The stock's breakout from upper trendline resistance denotes a finish to the range-bound trading.

Trading Range Strategies

Support and Resistance: If a security is in a deep rooted trading range, traders can buy when the price approaches support and sell when it arrives at resistance. Technical indicators, for example, the relative strength index (RSI), stochastic oscillator, and the commodity channel index (CCI), can be utilized to affirm overbought and oversold conditions when price oscillates inside a trading range.

For instance, a trader could enter a long position when the price of a stock is trading at support and the RSI gives an oversold perusing below 30. On the other hand, the trader might choose to open a short position when the RSI moves into overbought region over 70. A stop-loss order ought to be placed just outside of the trading range to limit risk.

Breakouts and Breakdowns: Traders can enter toward a breakout or breakdown from a trading range. To affirm the move is substantial, traders ought to utilize different indicators, for example, volume and price action.

For example, there ought to be a huge increase in volume on the initial breakout or breakdown, as well as several closes outside the trading range. Rather than chasing the price, traders might need to hang tight for a retracement before entering a trade. For instance, a buy limit order could be placed just over the highest point of the trading range, which presently acts as a support level. A stop-loss order could sit at the opposite side of the trading range to safeguard against a failed breakout.

Highlights

  • Ordinarily, traders use range-bound trading related to different indicators, for example, volume, to increase their chances of achievement.
  • Traders place stop-loss points just over the upper and lower trendlines to try not to have heavy losses from high-volume breakouts.
  • A range-bound trading strategy alludes to a method where traders buy at the support trendline and sell at the resistance trendline level for a given stock or option.