What is range trading?

Range trading is a strategy used when the price of a security fluctuates within a specific range. In this case, the price of securities may meander between fixed-resistance and support levels for a certain period of time.

What is a range-bound market?

A range-bound market is a market fluctuating between specific high and low levels. Some traders might expect the prices to bounce back from the support level and drop down from the resistance level at least twice to be sure a range is formed.

To understand the range-bound meaning, let us look at the following example. Suppose a security trades between Rs. 30 and Rs. 60/share. Rs. 30 is the support level, and Rs. 60 becomes the resistance level. As traders identify the range, they seek to buy at Rs. 30 and sell at Rs. 60.

What types of investments can I range trade?

Traders can use a range of trading strategies across various asset classes, such as stocks, ETFs, Options, etc.

What are some of the risks and limitations of range trading?

Although trading in a range-bound market may yield profits, there are some risks and limitations while using this strategy. Traders must ensure they follow precise market timing, i.e. assessing how long the securities will continue to trade in the specific range. Range trading can lead to considerable losses for the trader if the prices do not move in the expected direction during the given time horizon.

What are some range trading strategies?

Given below are some of the widely used technical indicators that can help in building range trading strategies:

  • Support and Resistance
  • Moving Averages
  • Volume Trends

How are support and resistance used in range trading?

Identifying support and resistance helps traders identify the upper level and the lower level for range trading. As prices advance the support level, more buyers are inclined to purchase the securities. So, buyers dominate at this level. Conversely, a resistance level is when prices reach a high and sellers are willing to sell, but buyers are not keen to purchase securities. Range traders enter the position at the support level and exit at the resistance level to generate maximum profits within the range.

How is volume used in range trading?

Volume plays a crucial part in range trading. Many technical traders believe price succeeds the volume. Therefore, to confirm a given trend, traders must ensure the volume is also increasing in the direction of the trend.

How are moving averages used with a range trading strategy?

An upward moving average on the technical charts signals a trend, whereas a horizontal moving average may indicate that the security is moving in a specific range. You should first determine whether the market is trending or not within a time frame. The moving average slope depicts the magnitude of the trend direction. Additionally, moving averages help determine range trading's critical support and resistance levels.

How might a range trade be set up?

Traders practising the range trading strategy seek to purchase securities around the support level. The security price fluctuates through the given range, and traders place a sell order as its price touches the resistance level. Additionally, a stop loss may be placed a notch below the support level.

How is range trading affected by market movement?

The markets can show diverse behaviour and patterns such as trending, range bound, non-trending etc. The first job of the trader is to determine if the market is in trend or not in the given time frame. After that, analysing the ongoing trend carefully is essential. Traders practising range trading must ensure they are updated with current market news and data since a substantial development in the markets can create an outbreak from the ongoing trading range and result in bullish or bearish trends. Traders must use stop-loss orders while entering range trading to hedge themselves from any downside risks.

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