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Range Trading: How It Works, Indicators & Risk Management

Positions may be held for longer periods as the strategy waits for the full oscillation from overbought to oversold conditions, or vice versa. Set stop-loss orders at a distance of 2x the value of the ATR from the entry point. This allows the trade to withstand the normal fluctuations of the market as indicated by the ATR. Then, join our Trade Together program for where we execute the strategy in live streams.

  1. A ranging market is usually characterized by low trading volume and volatility.
  2. We want to clarify that IG International does not have an official Line account at this time.
  3. We look at range trading, and how it can be used to provide opportunities for the times when a market is not displaying a clear trend in any one direction.
  4. When the price is at one extreme, we can look for candlestick patterns to confirm the potential reversal.

This strategy is typically applied in market conditions where the price exhibits consistent oscillation between these levels without establishing a long-term trend. Range trading, at its core, involves identifying stocks or securities that fluctuate within a specific price range. This is similar to predicting the highest and lowest scores in a series of basketball games; traders aim to buy low at the support level and sell high at the resistance level. Technical analysts closely follow ranges because they’re useful in pinpointing entry and exit points for trades.

Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. In this case, we know the price is overextended and a signal from here makes sense. Here’s an example (Figure 5) of CCI coming back from an extreme level and giving a sell signal in a ranging market.

Range Trading Using Oscillators and Indicators

Range trading and trend trading represent two distinct approaches, each with its own principles and strategies. The primary distinction lies in market volatility, directly impacting the range’s breadth. Instruments with higher volatility, like Bitcoin, entail amplified risk yet offer the potential for larger returns. Moreover, understanding market conditions and recognizing when the range is likely to break is crucial. Technical indicators like Bollinger Bands, Moving Averages, or the Relative Strength Index (RSI) are useful indicators to confirm entry and exit points within the range.

Learn the best range trading strategy to avoid getting chopped in a ranging market. Markets spend most of their time in range zones so you need to have a trading process that embraces range trading. Throughout this guide, you’ll hft arbitrage ea learn a new concept of range bars and the art of trading choppy market with the Bar Range indicator MT4. Trading a range can just utilise support and resistance levels, but it can also involve the use of indicators.

How much does trading cost?

Another approach would be to move your stop loss to your entry price as soon as the position is in profit by a set number of pips. Keep in mind that the market does whipsaw and could take out your stop if it’s too close to the market. The range is considered broken, and trading is ceased if the ATR breaks out of its continuous range, suggesting a change in market conditions.

Another way of using CCI would be to wait for a move above 100, preferably above 150 or 200, and then a cross back below 100 for a short trade. Alternatively, traders would wait for a dip below -100 and preferably -150 or -200 before a reversal and a cross above -100 for a potential long trade. Unlike other strategies that may trade less frequently, the Stochastic Oscillator strategy involves more frequent trading, capitalizing on the rapid momentum swings within the range.

Let’s take a look at how we can use some of the most common indicators out there, to our advantage when trading ranges. Below, we will discuss the CCI indicator but RSI is also another great example of an indicator that could help confirm signals during ranging conditions. Another approach would be to look for overall strength or weakness in the way the candlesticks are being formed. For example, let’s assume the price is moving lower and is near the lower boundaries of the range.

Understanding the Basics of Range Trading

The Stochastic Oscillator approach caters to traders seeking higher frequency activity, exploiting rapid price shifts and extended trade durations. The success of range trading can depend on how many participants are actively engaged in it at any point in time, even if their strategies are different. This type of trading may not be suited for the faint of heart or less experienced traders. Consider getting your feet wet first by trading in more stable low-beta sectors, such as healthcare.

In other words, the range bar doesn’t close at a specific time, but instead only when a range is completed. Range bars are a convenient replacement of the most popular types of charts (bar chart, line chart, and candlestick chart). Range bars are used in technical analysis the same way as any other form of charting technique. The trader may want to wait for a retracement in this trend before placing the trade, in order to avoid ‘chasing’ a market. Buy or sell limit orders could be used in this eventuality, with the order placed so as to take advantage of the breakout.

Bigger timeframes can see price action consolidating for days and weeks, maybe even months. Remember that ranging conditions on a daily chart could mean strong trends on a smaller timeframe. Trade them knowing that your latest trade may fail because the range could end. You might make a few profitable trades here and there but always keep your stop losses intact and your eyes on the market to know when the range is coming to an end.

Range Trading Vs Trend Trading

The range for fixed-income instruments is much tighter than that for commodities and equities that are more volatile in price. A Treasury bond or government security typically has a smaller trading range than a junk bond or convertible security, even for fixed-income instruments. In this chart, a trader might have noticed that the stock was starting to form a price channel in late November and early December. Potential support and resistance levels are more clearly visible on the chart. For example, if you have a 100 pips range selected, each of these range bars is going to be equivalent to that range.

A conservative investor prefers securities with smaller price fluctuations compared to securities that are susceptible to significant gyrations. Day traders frequently use the trading range of the first half-hour of the trading session as a reference point for their intraday strategies. For example, a trader might buy a stock if it breaks above its opening trading range. With that, different from trend trading, the most notable feature of range trading is that it enables a trader to trade inside a range while waiting for a breakout to occur and trade it. This helps traders combine two very effective methods using the range trade strategy. For example, the Average Directional Index (ADX) is certainly among the best indicators to determine the strength of a trend.

Much like trend trading, which can be used on any trading technique and time frame, range trading is also used by all types of traders – those who apply the scalping, day, position, or swing trading strategy. With the best range trading strategy, you have the ability to see the market structure a little bit more clearly. The most important advantage of range bars chart is that by eliminating the time factor, range bars become highly effective when used in combination with other technical indicators like oscillators. Most traders place stop-loss points just above the upper and lower trendlines to mitigate the risk of heavy losses from a high volume breakout or breakdown. For example, if a security has a lower support trendline at $10.00 and an upper resistance trendline at $15.00, the trader may purchase the stock at $11.00, just after a rebound, with a stop-loss of $9.00.