When you trade regularly, you enter with two chief objectives – to book as high a profit as possible and to exit the trade with minimum losses. To this end, you employ several different techniques and strategies to achieve your objectives. One such technique that is rapidly gaining popularity is known as the range trading technique. This article explains what is range trading along with its different types.
What is range trading?
Range trading is a popular trading strategy that helps identify overbought and oversold assets (known as the support and resistance areas). Range traders buy assets during oversold or support periods and sell them during overbought or resistance periods. While you can implement the range trading strategy at any time, it proves most effective when the market lacks direction, and no obvious long-term trend is apparent. However, this technique appears in its weakest form in a trending market, specifically when market directional bias goes unaccounted.
4 types of ranges
If trading the range and booking profits is your goal, it is imperative that you learn about the different types of ranges that can back your trading strategy. Typically, you would come across four ranges. They are as under:
1. The rectangular range
A rectangular range is one which is characterised by horizontal and sideways price movements. These movements appear between a lower support and an upper resistance. The appearance of the rectangular range on trading charts and indicators is rather typical during most of the market conditions, but not so much as the channel or continuation ranges. The rectangular range indicates a consolidation period and tends to have shorter time frames than most other ranges, thus leading to faster trading opportunities.
2. The Diagonal range
Occurring in the form of price channels, diagonal ranges are just as popular among range traders. In this type of range trading, the breakouts generally occur on the opposite end of the trending movement. Also, the prices ascend and descend through a sloping trend channel, which can be rectangular, narrowing or broadening. This occurrence provides traders with an upper hand, enabling them to anticipate breakouts that can help them earn a profit.
3. The continuation range
The range trading chart pattern which unfolds during a trend is known as the continuation range. Flags, wedges triangles and pennants characterise this range, and it typically occurs as a correction against predominant trends. This range may be traded as a range or a breakout, based on your trading time horizon. Both bullish and bearish continuation ranges can occur at any time in the real-time. Also, this range may frequently occur during an ongoing pattern or trend, often resulting in an instant breakout. It is ideal for traders looking to open positions and rapidly score profits.
4. The Irregular ranges
The fourth type of range trading is known as an irregular range. At first glances, most ranges don’t generally present apparent patterns. As such, when an irregular trend unfolds, it typically occurs near a central pivot line, with support and resistance lines cropping up around it. While it can be quite challenging to determine the support and resistance ideas in an irregular range, you can find several opportunities by trading near the central pivot axis, as opposed to extremes. It can prove quite profitable if you learn to identify the resistance lines that make up the range.
Now that you know what is range trading and its types and you too can consider using the range trading strategy in your trades. To know more about the different trading strategies contact an Angel One advisor.