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Techniques For Profitable Trading In Range-bound Markets – CFDs are complex instruments and carry a high risk of losing money quickly due to leverage. 70.62% of retail investor accounts lose money trading CFDs with this provider.
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Techniques For Profitable Trading In Range-bound Markets
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Hantec Markets does not offer its services to residents of certain jurisdictions, including the United States, Iran, Myanmar and North Korea. A range-bound market refers to a situation where financial assets are going nowhere. For example, when a stock fluctuates between $10 and $12 for several weeks, it can be said to be a range-bound market.
This situation is one of the least favorite for day traders because it is much more difficult to find good opportunities to enter/exit the market and make some profit. More difficult, but not impossible.
In this article, we’ll briefly discuss what a range-limiting market is, why it happens, and some range-trading strategies you can use.
As mentioned, a range-bound market is a period when an asset, such as a stock, commodity, exchange-traded fund (ETF), and currency pair, is in a narrow range. In the chart below, we can see that ExxonMobil’s stock price has been in a relatively tight range.
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A range bound market is often the worst for traders because it lacks basic buying and selling opportunities. Indeed, in the past we have seen many investment banks, such as Goldman Sachs and Morgan Stanley, report lower returns during periods of low volatility.
First, stocks tend to stay in narrow ranges when there is no major news about the company or the economy. During this time, supply and demand for inventories and other assets must be in balance.
Second, from time to time, stocks tend to stay in tight ranges due to seasonality reasons. For example, most of the time, stocks stay in a narrow range during the summer as more institutional investors go on vacation. During this period, there is usually a significantly lower volume.
Also, we tend to have lower volatility in the last week of the year. Many investors are on vacation at this time.
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Third, there is sometimes low volatility as the market waits for a major economic data or event. When this happens, investors are usually unsure whether to buy or short the financial asset. As a result, this usually results in relatively low volatility.
In addition, some sectors tend to remain in narrow ranges for long periods of time. These are some boring sectors like forestry and industrial.
Another reason is that some assets are usually under strict control. For example, the USD/HKD pair is usually in a tight range because the Hong Kong dollar is usually pegged to the US dollar. As such, there is usually no need to buy or short the currency as it is usually very predictable.
There are several approaches to trading in a range bound market. First, you need to look beneath the surface and identify stocks that are showing signs of volatility. For example, sometimes the S&P 500 index can be in a tight range for months. During this time, many companies in the index may show signs of strong volatility.
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Therefore, we recommend that you dig deeper to identify stocks that are showing signs of volatility. There are several ways to do this.
First, you can see the most moving stocks during the premarket and during the regular session. You can use free tools provided by companies like Investing.com and Market Chamelion to find these stocks.
Second, you can subscribe to a market checklist that gives you the latest top movers and the reasons for their moves. At DTTW™, we have a free checklist that provides you with the most important companies.
Another approach to trading range-bound markets is to trade breakouts. A breakout occurs when the range ends and the asset begins a new trend. This breakout may occur organically or may be triggered by an external factor such as a news event, earnings report, or policy issue.
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There are several ways you can trade breakouts, but the most common is to use pending orders. A pending order is one that is executed at a certain level. For example, if a stock is trading at $20, you can place a buy-stop order at $22. A buy trade will be executed when the asset crosses this level.
Trading disruptions using pending orders can be a highly profitable business as it is usually the start of a new trend.
Another relatively common strategy when trading breakouts is known as scalping. This is where you decide to take small profits when the asset is in a range. For example, if a stock has formed a horizontal channel between $20 and $22, you can place a long trade when it falls to $20 and a short trade when it moves to $22.
Although these are small gains, they will likely add up over time. We recommend using this strategy in a regular session when market activity has cooled down a bit.
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Range-bound markets can be boring for many traders. However, in this article we have discussed what a range-bound market is and some of the best strategies you can use to make money during this time.
The Day Trade worldwide team is not made up of one person, but a group of experts (some with over 10 years of experience) who write or quality control the articles. Do you have a different opinion than us? We will be happy to discuss it with you! Range strategies refer to the methods by which traders capitalize on a sideways moving market – also known as a sideways market. For example, users who trade in sideways conditions will repeatedly buy an asset at a low support level and then sell it at a high resistance level.
As the name implies, a sideways market is a trading environment in which price action moves in a horizontal channel between high and low prices. The idea is that sideways movement creates relatively predictable highs and lows for trading assets. You can use some technical indicators such as Average True Range (ATR) and High Low Range (HLB) to identify markets that are in a range.
Of course, market behavior cannot be predicted with 100% accuracy. Traders trying to capitalize on a sideways market may, for example, miss an upcoming breakout or worse – suffer heavy losses during a downtrend.
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Although it originates from traditional markets such as the stock market and forex, range trading is also popular among crypto traders.
Crypto traders take advantage of sideways markets by identifying key support (low price) and resistance (high price) levels. Assets at the support level trend line offer an optimal opportunity to buy low, while traders sell high when the asset reaches the resistance trend line. This area where prices move back and forth is called a range, also known as a price channel.
Here’s an example to help you understand better: Let’s say an asset has regularly moved between $50 and $53 over the past few days. Traders using the range-limiting strategy buy the asset at $50 (support) and sell the asset at $53 (resistance).
The upside is significantly lower than the breakout time, but markets don’t move in the same direction all the time. Sometimes, the market will stop and move sideways before continuing the previous trend. On the other hand, the market may be in a period of uncertainty until the opposition reverses.
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Once traders have determined the range, the simplest strategy is to place a buy order near support and a sell order near resistance.
Traders often mitigate this risk by placing stop-loss orders near the asset’s support and resistance levels. If an asset breaks a price channel, traders often change their strategy or wait for range-bound conditions to return.
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