Dear Happy Investor, are you considering to begin with range trading? This form of trading offers a more active and short-term approach to profiting from price fluctuations. A solid range trading strategy can be valuable. On the other hand, more active trading also means that the risk (of losing money) increases. In this article, you'll find tips and explanations to get started with range trading.
Let's get started!
What is Range Trading and what is its purpose?
A trading range occurs when a market trades consistently between two prices or levels for an extended length of time. Range trading, like trend following, may be observed in all time frames, from short-term five-minute charts to long-term daily and monthly charts (check image).
But unlike trend following, range trading involves traders going long and short (at different times) based on the price's position inside the range. Typically, trend following traders would go with the general trend, buying dips in a rising trend and selling rallies in a falling one.
On the other hand, range trading permits a trader to do both because a price is moving between two distinct levels and (at least in that time frame) making no progress either upward or downward. Traders can take advantage of a range by buying at its support price and selling at its resistance price until a breakout defines a direction.
Interestingly, knowledge of day trading also helps long-term investors. After all, as a long-term investor, we want to buy unique companies at a favorable price. This combination leads to the best stocks with exponential returns. In the very first place, this is determined on the basis of fundamental analysis. But in some cases it is important to be able to identify a long-term downward trend. In this case, a Value stock may be fundamentally very attractive, but it is better to wait a little longer for a "bottom". On the other hand, market timing is particularly tricky 😉 .
Range Trading Strategies Explained
A trading strategy that aims to identify and capitalise on stocks trading in price channels is known as range-bound trading. A trader can purchase a security at the lower trendline support (bottom of the channel) and sell it at the higher trendline resistance after identifying important support and resistance levels and connecting them with horizontal trendlines (top of the channel).
Below you will find an explanation of two important principles for starting range trading as a day trading strategy.
Support and Resistance
Every beginner of range trading must be able to recognize support and resistance levels. These are the basics. If a market is in a well-defined trading range, traders can go long when the price approaches the support level and go short when it hits the resistance level. When price oscillates within a trading range, technical indicators such as the relative strength index (RSI), stochastic oscillator, and commodity channel index (CCI) can be used to validate overbought and oversold positions.
For example, a trader can go position if the price of a stock is trading at support and the RSI is below 30. Alternatively, the trader may elect to start a short position when the RSI moves over 70 and enters the overbought territory. A stop-loss should be placed idealy just above or below the resistance or support trading range to reduce risk.
Breakouts and Breakdowns
Essential when beginning range trading is recognizing breakouts and breakdowns. Traders might enter in the direction of a trading range breakout or breakdown. Other indicators, such as volume and price action, should be used to confirm the move's validity.
For instance, on the initial breakout or breakdown, there should be a significant increase in volume and multiple closes outside the trading range. Rather than chasing the price, traders should wait for a retracement before entering a trade. A buy limit order, for example, maybe placed right above the top of the trading range, which now acts support level. To safeguard against a failed breakout, a stop-loss order might be placed on the opposite side of the trading range.
Starting with range trading as a day trading strategy is possible, although it has high risk to money loss. Below we give some tips to help you get started. However the best tip is to first invest in your own knowledge and skills. After all, the better you can range trade, the lower the risk of loss.
We from Happy Investors only recommend long-term investing. This contains relatively much less risk. In addition, long-term investing can lead to exponential returns. An example of this is our high-quality stocks from Capitalist Exploits review.
Range Trading Markets: where to begin?
Range trading strategies may be applied to any asset, including currency, stocks, and cryptocurrencies. The fundamental distinction between these assets is their volatility and range.
Higher volatility instruments, such as investing in crypto, have a higher risk of loss while range trading. On the other hand they may also generate higher profits. Crypto currencies are, in our opinion, less suitable for the long term. However, they are of interest to the experienced short-term trader. Range trading in crypto can work out well, but keep in mind the increased risks. The golden rule is: only speculate with small amounts that you can afford to lose.
Range trading can also be useful if you begin with forex trading. Currency crosses, which do not include the US dollar and hence have a weaker trend, are the ideal range trading forex pairs. The EUR/CHF pair is a fantastic example because the European and Swiss economies are growing at relatively comparable rates.
Finally, a range trading strategy is possible with indices. Even when indexes like the Nifty Bank and the S&P 500 are seeing general growth, they might be attractive options for intraday range trading. Range-bound trading may also be applied to binary options, where the payment is either a fixed amount or nothing at all. Traders use binary options to speculate on whether the price will remain within the investing range.
Note that in addition to range trading, there are other day trading strategies you can employ.
Tips to begin with Range Trading
To begin with range trading as day trading strategy can challenging. Like any other day trading strategy, range trading includes high risk of losing money. At Happy Investors we are long-term investors. We do not encourage unnecessary high-risk investment styles like day trading. Why take the risk, if you can generate sustainable high returns with the best stocks and ETF’s? High-quality stocks can be analyzed (fundamentally) to determine their intrinsic value and future value. It provides more certainty (although no guaranty).
Nonetheless, if you decide to begin with range trading, there are a few tips to consider. First and most important is to test your skills at a demoaccount. A demoaccount gives you “fake money” to play with. Learn your skills for at least many days in a row and determine your chances of winning with range trading.
Almost all of the best day trading brokers have a free demoaccount.
Here are 3 more tips for range trading.
Identify the Range
To get off to a good start, you'll need to determine the trading range. This can be seen when a currency has recovered from a support zone at least twice. The currency should have also retreated from a resistance area at least twice. These highs and lows don't need to be identical, but they should be close together.
Some traders like to wait until more than two highs, and lows have happened before entering the market, but this is a question of personal opinion. After these highs and lows have happened and been pinpointed, a straight line may be drawn to link them on a chart, creating the currency trading range.
Set Up Your Entry
With a trading range in mind, you'll need to plan your entry. You may do this by placing buy orders at support levels and sell orders near resistance levels. To aid with this, some traders employ indicators (such as the relative strength index and commodity channel index) to conduct trades. While employing indicators correctly, any trader should be able to demonstrate tighter control when putting up an entry, often by gaining a better understanding of when to enter or exit a position.
Manage Risk at Range Trading
After identifying your range and setting up your entry, don't forget the final step in any effective range trading attempt. Risk management is always important no matter how you choose to trade, but it is more important when you choose to range trade. If a resistance or support level breaks, traders will rightfully desire to exit a range-based position.
Having a stop loss in place can assist when it comes to ensuring that range trading is risk-averse. While selling the resistance zone of a range, it is common to practice placing a stop loss above a prior high, and you may easily invert the procedure when buying support. Remember that your efforts will be most effective when you use proper risk control when you're range trading.
Unlike other trading strategies, range trading does not embrace the Wild West side of forex; in fact, this strategy is on the tame side. Some have argued that range trading is too simplistic for modern market conditions, yet its relevance and popularity have never wavered. When the forex market lacks a clear direction, range trading can significantly influence it. You can earn big money trading ranges if you identify the range, time your entry, limit your risk exposure, and, most importantly, grasp the fundamentals of range trading.
Questions or comments about starting range trading? Let us know in the comments below!