As a trader, you might always look for the best trading techniques that can increase your profitability. Chances are, you might have used a couple of indicators and tools as well. But have you ever tried range trading?
Like other binary options trading strategies, range trading is also a helpful strategy that you can correctly use to minimize losses. It is a popular and easy-to-use market approach that several traders trust.
If you also want to use range trading, you should know what this trading strategy truly is and the different types of ranges? This article explains all the essential aspects of range trading in detail.
Range trading is a simple trading strategy that helps traders to identify overbought and oversold assets. It capitalizes on the market fluctuation during a range. The sideway trends in the range are support and resistance band.
As a range trader, you should buy an asset during the oversold period, also known as the support period. And later, you can sell it during the overbought period, i.e., the resistance period. You can do this until a breakout occurs.
You can implement range trading at any time. But it’s advised to take advantage of this trading strategy when the market lacks direction. That’s because, at this point, range trading is at its weakest.
In simple words, during range trading, the market moves between two levels for a given time. Additionally, you can spot this trading at different time frames, i.e., short-term and long-term charts.
When you trade using a range trading strategy, you can expect one of four outcomes.
- The trade ends outside the range: If your trade ends outside the range on the selected price boundaries, you are In The Money.
- The trade ends inside the range: If the price stays inside the selected range during expiration, you are In The Money.
- Stays between the price boundaries: If your trade stays inside the price boundaries, it means that the trade does not breach the boundaries at any time.
- Goes outside the boundaries: Your trade should break the selected price boundaries at least once to profit from this situation.
If making profits from range trading is your goal, you should know about different types of ranges. In most cases, you will come across four types.
Horizontal and sideways price movements characterize this common range. You can spot this range between upper resistance and lower support level.
One of the best things about rectangle range is that you can easily find it even without using an indicator. Its presence in the trading chart shows a consolidation period. Also, it has a shorter time frame and offers more opportunities.
But this range can misguide a trader who doesn’t look for long-term patterns.
The diagonal range is as popular among traders as the rectangle range. In this range, the price increases or decreases via a sloping trend channel. The channel can be either narrowing, broadening, or rectangle.
Here, the breakout occurs at the opposite trending movement. It offers traders an excellent trading opportunity, but there is a downside to this type of range.
While it occurs quickly, sometimes, the diagonal range can take years to develop. Thus, it gets difficult for traders to predict when the breakout will occur.
This kind of range unfolds within a trend and. You can spot it in the form of a triangle, flag, pendant, and wedges. It occurs as a correction against a predominant trend.
The best thing about the continuation trend is that you can trade it as a breakout or as a range based on your trading time horizon. Not to mention that a bearish and bullish range can occur at any time.
If you like to trade during a breakout, you would be glad to know that continuation range can take place any time, always resulting in a quick breakout. That loosely translates into more trading opportunities.
But you should be careful while trading in the continuation range because it is always spotted inside another trend. That’s why new traders don’t trade in this range.
The last type of range is the irregular range that generally does not have any obvious pattern. You can spot an irregular range line around the central pivot line. Also, when there is an irregular range, support and resistance lines crop up around it.
If you are trading in the irregular range, you might find it tricky to spot support and resistance areas. But you can find more trading opportunities around the central pivot axis.
One downside of the irregular range is that you will require additional trading tools for identifying the ranges.
It’s essential to know the right way of using a range trading strategy to make winning trades.
Here is the step-by-step guide for using this trading strategy.
To start the right foot, you are required to identify a non-trending market. You can find a suitable market using a trading indicator like moving average. Make sure that you don’t keep the time range greater than the period that is being analyzed.
Other than the moving average indicator, you can also use the Average Directional Index (ADX). This indicator can help you analyze the strength of the trend.
You can identify range trading areas easily on a candlestick chart. For this, you can locate the range on the chart after the currency has retreated from the resistance area at least twice.
Similarly, you should wait till the currency has recovered from the support area at least twice. Once the highs and lows have occurred, you can create a straight line that shows the currency trading range.
If the trading range is wide, it shows a volatile market. You can trade in this range but remember that as profitable as wide trading ranges are, they are equally risky.
You can determine the risk of trading a particular asset by using the Average Daily Range indicator.
You should then set up your entry. You can easily do this by selling near resistance levels and buying near support levels.
You can further simplify the process of finding entry points by using indicators. If you correctly use the indicator, you can have a tighter control when setting up the entry point.
After finding an entry, the last step is to manage risk. Even if you are an experienced trader, you should know the right way of managing risk. After all, it can save you from future losses.
You can minimize the risk of losing by placing a stop loss. You can place it above the previous high when selling the resistance zone for better results. You can invert the process when buying support.
Range trading is on the tame side. Thus, it’s better to place a trade with appropriate risk management.
You can also take advantage of range breakout, especially when the market opens. That’s because it’s one of the most active trading periods. Thus, more profitability.
If you are looking for an easier way to use range trading for making more profit, you can take the help of trading bots. A trading bot is designed to facilitate the range trade by following the given instructions automatically.
You can range trade with bots by setting to buy if the price crosses above the support band. Also, you can set to sell when the price crosses below the resistance level.
There are so many reasons why you should be using this trading strategy.
- You can apply this trading strategy to any market. That means you don’t have to limit your trading to any particular hour.
- Traders can earn huge profitability from regular periods even when the market is not trending.
- You can easily place stop-loss since you have simple entry and exit points after a range has formed.
- In the case of range trading, the risk of losing trade because of major economic news reduces.
Along with advantages, range trading also has certain limitations.
- It gets a little tricky to understand when the market is within a range and when it will break.
- If you are using range trading, you are required to make frequent investments and pay increasing commission fees.
- Lastly, identifying a suitable range and market is complicated.
Range trading is an excellent way of investing in the market when there is no clear direction. You can make the most out of this strategy by keeping yourself up-to-date with the current financial news.
By using this trading strategy, you can also earn huge profitability from non-trending markets. But identifying support and resistance can get a little challenging. Not to mention that it’s nearly impossible to understand when a range starts and ends.
You can, however, overcome the limitations by practicing a range trading strategy with a demo account. Doing this can also help you with predicting breakout points and defining range areas.