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Range trading is a trading strategy that capitalises on the predictable price movements within a specific range-bound market. Traders employing range trading seek to identify the upper and lower boundaries of a trading range, taking advantage of price fluctuations within that range. This strategy involves buying at support levels and selling at resistance levels, aiming to profit from the repetitive nature of price movements in a sideways market. Let’s find out more.
Table of Contents
Defining Range Trading
Range trading is a strategic approach where traders analyse a technical pattern resembling a well-defined channel or range before executing trades. This channel emerges from consistent highs and lows between demand and supply zones over a specific timeframe. In essence, the demand zone, acting as support, establishes the lower boundary, while the supply zone, serving as resistance, forms the upper boundary of the channel. The price oscillates between these boundaries, exhibiting a tendency to reverse near the resistance and fall towards support, and vice versa. For a range trader actively engaging in range trading, the focus lies on assessing the price range and capitalising on the recurrent observable price actions within the defined range. To gain a deeper understanding of how to effectively range trade, let’s explore the strategies and nuances involved in this approach.
Range Trading Strategies
Range-Bound Trading
Range-bound trading is the obvious range trading strategy that comes to mind when speaking of range trading. This strategy involves identifying a trading range and assessing the behaviour of the price between the ranges. One ideally wants the boundaries of the range to be strong and reliable support and resistance zones. So, ensure that the price has bounced off the support and resistance at least twice in each case.
Range trading involves capitalising on price movements within a defined range. The strategy entails taking a long position when the price rebounds from the support level, anticipating a trend continuation towards the resistance. Profits are booked near the resistance as a reversal is expected.
For instance, if a stock’s price fluctuates between ₹500 and ₹600, with ₹500 as support and ₹600 as resistance, a trader may initiate a long position when the price shows support at ₹500, waiting for confirmation before entering. Riding the trend, profits are secured as the price nears ₹600.
It’s crucial to monitor the price for potential reversals and confirmation. While shorting at the resistance and booking profits at the support is an option, it comes with risks, and traders should fully comprehend the associated restrictions and complexities before considering short positions in the Indian market.
Breakout Trading
In contrast to the range-bound trading strategy, breakout trading involves a wait-and-watch approach within the established trading range. During this phase, no trades are made as the price fluctuates between strong support and resistance levels. The strategy comes into play when the price breaks above the channel resistance, signalling a potential upward breakout, or when it crosses below the channel support, indicating a possible downward breakout. The breakout or breakdown trading strategy is grounded in the expectation that price movements will be significant after the range is breached—upwards for a breakout and downwards for a breakdown.
Using the example of a stock trading between ₹500 and ₹600, traders refrain from taking positions within this range. Instead, they patiently wait for a breakout above ₹600 or a breakdown below ₹500 to initiate long or short positions, respectively, anticipating the emergence of a substantial bullish or bearish trend.
Using Stop Losses in Ranges Trading
In both range-bound and breakout/breakdown scenarios, the price might move against one’s expectations. For example, in range-bound trading, if a long position is taken at ₹505 anticipating a move toward the resistance at ₹600, but the price reverses at ₹510 and falls below support, reaching ₹450. Similarly, in breakout trading, if the price breaks above ₹600 but swiftly reverses, crashing down to ₹500. In such situations, implementing a stop loss order is essential to limit losses. The stop loss order triggers an exit when the price touches the specified stop loss trigger price, such as ₹495 in the range-bound scenario or ₹590 in the breakout trading case, helping to manage risk effectively.
Conclusion
Range trading is a strategy where traders capitalise on price movements within a defined channel formed by consistent highs and lows. This channel is established by support and resistance zones, allowing traders to take advantage of price fluctuations. Whether executing long positions at support or short positions at resistance, range traders aim to profit from the cyclical nature of price movements within the established channel. Employing stop loss orders is crucial to manage risks effectively in case the price deviates from anticipated movements.