Introduction to Range Trading

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 and limitations.

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.

Strategies of Range Trading

Bounce Strategy

The bounce strategy focuses on trading within a well-defined price range. Traders buy when the price nears the support level (the lower end of the range) and sell when it approaches the resistance level (the upper end).

The goal is to take advantage of the price rebounding or “bouncing” between these two levels. This method works best in stable markets where price moves predictably between support and resistance.

Breakout Strategy

Unlike the bounce approach, the breakout strategy looks for moments when the price breaks out of its usual range. Traders monitor for a strong move above the resistance or below the support level.

A breakout often signals a new trend forming, and traders aim to enter early to benefit from the momentum that follows. This strategy is useful when the market shows signs of volatility or a shift in sentiment.

Types of Ranges in Trading

• Horizontal Range

This is the easiest to spot. The price moves between a high (resistance) and a low (support), creating a sideways or flat movement. Traders usually buy near the lower edge and sell near the upper edge.

• Ascending Range

In this type of range, the price keeps making higher lows while hitting the same resistance at the top. It shows that buyers are getting stronger, and the price may break above the resistance soon.

• Descending Range

Here, the price forms lower highs but holds steady at a certain support level. This shows that sellers are gaining control, and there’s a chance the price may break below the support.

• Symmetrical Triangle

This pattern forms when the price is squeezed between two sloping trendlines—one going down and one going up. It shows that the market is uncertain. A breakout can happen in either direction.

• Ascending Triangle

This range forms when the price has a flat top (resistance) but keeps making higher lows. It’s often seen as a bullish sign, with the possibility of the price breaking above the resistance.

• Descending Triangle

This range shows a flat support line at the bottom but lower highs forming at the top. It signals selling pressure, and if the price breaks below the support, it could lead to a further drop.

• Rectangle Range

This is similar to a horizontal range. The price moves between a fixed high and low, forming a box shape. Traders use this to buy low and sell high until the price breaks out of the box.

• Rounded Range

In this pattern, the support and resistance levels form a gentle curve rather than straight lines. It shows a slow shift in market sentiment and may lead to a breakout as momentum builds.

Risks and Limitations of Range Trading

• False breakouts: Sometimes, the price may appear to break out of the range but quickly return inside it. These false signals can lead to losses if a trader enters a position too early.
• Sudden market changes: News, economic updates, or changes in sentiment can quickly turn a stable market into a trending one, making range trading ineffective.
• Limited profit potential: Since trades are made within a fixed range, the gains are usually small. This means traders might miss out on bigger moves during trending markets.
• Choppy price movements: Prices inside a range can move up and down unpredictably, making it hard to spot clear buy or sell signals.
• Requires close monitoring: Range trading often needs constant attention to catch the right entry and exit points, which can be time-consuming and demanding.
• Missed trends: If the market starts trending strongly, traders using range strategies may miss out on larger opportunities.
• Mental strain: Staying patient and sticking to the strategy without giving into emotions can be tough, especially during periods of uncertainty.
• Misleading indicators: Technical indicators might not work as reliably inside a range, leading to poor trade decisions.
• Unexpected breakouts: Breakouts can happen suddenly and with strong momentum. If not prepared, traders can face quick and heavy losses.
• Lower effectiveness in volatile markets: When the market is highly volatile, range trading might not deliver good results, as price swings can break support or resistance levels easily.

Conclusion

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.

FAQs