A lot of traders are in a constant search for the one trade that will work best for them. Whether these traders choose intraday, swing, or long-term as their strategy – they will always be looking for a single position to hold, squeeze, and take as much profit as possible. That works… for them.
But what if I would tell you that being the ‘boring trader’ could be, for some people, even a better choice. In my view, trading inside a range is not the most exciting way to earn money, but it is certainly one of the most effective ways to do so. If you are the kind of trader that prefers to make 8 out of 10 profitable trades instead of 2 out of 10, then learning how to trade ranging markets is exactly what you need to do.
What is Range Trading?
Well, as the name implies, range trading is a form of strategy in which you are basically buying and selling an asset inside a range in a chart. In essence, this method is characterized by prices staying in a predefined range over time, so the range-bound trader buys the asset at the support level and sells the asset at the resistance level.
With range trading, traders can take advantage of trading periods where the markets are in consolidation and there’s a sideways market pattern. As the vast majority of markets do not move in a certain direction at all times, you’ll find out that range trading is a necessary skill and one of the most useful trading strategies to trade the markets. And, since range trading can be analyzed in various time frames depending on the type of trading strategy, it can be used by long-term investors as well as by intraday traders.
Why is Range Trading Better than Trend Trading?
The best way to understand why range trading might be better than trend trading – is to first comprehend the logic of trading the financial markets. Basically, when you are trading the forex and commodity markets, you are buying and selling valuable assets that are being used as the core structure of the economy, and society. This is, for example, one of the major obstacles for Bitcoin right now. The volatility of Bitcoin as a currency might make it a great asset for speculation, however, it cannot yet be used as a medium of exchange. In the words of Janet Yellen, Bitcoin is an extremely inefficient currency to make transactions.
Wheat, on the other hand, has been trading pretty much at the same levels for the last 50 years since the early years of the 70s (as shown in the chart below). Yes, 50 years. This makes Wheat (much like corn and some other commodities) an excellent instrument for range trading, particularly if you are planning to day trade the markets.
The same happens in the forex market. Most of the time, FX currency pairs are trading in consolidation, and typically have one or two trends in a calendar year. This does not come as a surprise as currencies are an integral part of the economy and are being ‘managed’ by central banks so they remain stable in order to be used as a medium of exchange.
Consequently, trend traders are often tricked by the markets that the next trend is around the corner and that there is one direction for the markets. Yet, the markets have their own logic and in most cases, these assets are in a never-ending search for equilibrium.
As a result, trend trading is more difficult and generates more losing trades than profitable trades. In range trading, on the other hand, things are simple. There’s no attempt to predict the next trend and find a clear direction in the market. Instead, the only action range traders are required to take is to trade inside a channel and make sure they follow the rules of range trading – Buy at the bottom, sell at the high, and use leverage…
How to Trade Ranging Markets?
When dealing with trading range markets, there are two ways to use this strategy. The first way is to find a range pattern on an upward or downward trendline. Personally, I find it very difficult to trade a range inside a trendline so we won’t be focusing on this pattern. Nonetheless, this is how the pattern works – you are selling the currency pair when the price touches the upper line and buying the pair when it’s at the bottom.
The second way is to find a range-bound market in which the price bounces between the high and low, or support and resistance. In this case, we are looking at a market that has no direction and is in a state of consolidation, meaning prices move in a sideways range.
So, to get started in range trading, the first step in this strategy is to identify a range-bound market where you can apply the strategy. Once you have identified a market in consolidation, you simply need to draw support and resistance levels at the bottom and at the top of the range. On a side note, it could be beneficial to research on other sites and forums to find suggestions for support and resistance levels around your range bound. Since many traders are looking at the same data of support and resistance levels, then the levels you determine to be your range could be ‘stronger’.
For example – as shown in the EUR/USD daily chart above, the pair is trading in a range-bound between 1.23 to 1.60. In this case, as the current market price gets closer to the support level, the trade would be to buy the pair with a tight stop loss below the supporting level. If the price breaks below and holds for several days below the support level, you switch your strategy and short the EUR/USD pair.
As previously mentioned, range training is also an effective strategy for intraday and swing traders. So, in a smaller time frame, the price often fluctuates a few pips here and there. For example, in the EUR/USD 5 minutes chart below, the price fluctuates between 1.159 to 1.16. It’s a small range but enough for every skilled range trader to make profits.
Finally, another thing to take into account when trading ranges is to choose the right technical analysis indicators. This is not mandatory as it is certainly possible to identify entry and exit levels by only using horizontal or trend lines. However, if you are a technical analysis trader, the Relative Strength Index indicator, Bollinger Bands, and the Commodity Channel Index are some most effective indicators to use in a ranging market.
Trade a Ranging Market – Level 2 order Book
Occasionally, you’ll notice a market that is simply stuck. Literally, stuck. How do you trade it?
Well, in markets where you get access to a level 2 order book, you can essentially place orders on both sides of the market. Or, in other words, you are a buyer and a seller in the same specific market. Once you get an execution on one side, you simply switch sides and wait in the queue to get execution to close the position. Bear in mind that it can be a nerve-wracking experience as you need to have patience and discipline. However, it’s an excellent way to collect profits with low risk, especially when you use high leverage in your trading.
The Bottom Line
So, all things considered, range trading is certainly a unique technique to trade the markets. Once you have identified a non-trending market, you should absolutely use it. And in some cases, you’ll notice the range naturally, seeing the asset bouncing up and down and remaining in consolidation.
From my experience, with this trading strategy, you can collect profits many times and increase the possibility of having a positive track record, in a fairly low-risk method of strategy. The truth is… that being boring can be an excellent thing in trading. The only question you need to ask yourself – can you be boring???