When the price of a stock exhibits a definitive bullish or bearish trend, it may rise or fall significantly. As a trader, you can make use of this price movement to earn potentially large profits. However, the prices of stocks do not always trend steeply upward or downward. Most of the time, the prices fluctuate between specific ranges only, making it hard to identify and capitalise on big movements.
Here is where range trading stocks can be beneficial instead. Not sure what the meaning of range trading is? Check out the key details of what range trading is and how range traders can use minimal and definitive price movements to their advantage.
What is Range Trading?
Range trading is a strategy that involves the active purchase and sale of shares within a defined price range. It is best suited for a range-bound market scenario, where the prices of stocks swing between clearly established support and resistance levels. Once you identify these two ranges, you can place buy orders around the support level and sell orders around the resistance level.
It is advisable to use range trading only when there is no long-term trend prevailing in the market. You can identify ranges for different timelines — from as short as one trading day or as long as a few weeks or months. The important thing is to ensure there is no clear uptrend or downtrend because range trading does not work effectively under those market conditions.
Types of Ranges
There are different types of ranges that you can identify and use for your trading strategy. Check out the common range formations in the market.
- Horizontal Range
This is the easiest type of range to identify because the prices of stocks move within clearly defined lower support levels and upper resistance levels. There is no mark of an impending uptrend or downtrend in this market.
- Ascending Range
An ascending range is characterised by constant resistance levels and ascending support levels that get higher over time. This indicates rising buying pressure, which may lead to an uptrend breakout.
- Descending Range
A descending range involves constant support levels but descending resistance levels that get lower over time. This is because sellers are willing to trade at lower prices, leading to more bearish pressure in the market.
- Rounded Range
Here, both the support and resistance levels fluctuate gradually, forming a curve or a rounded pattern on the chart. This kind of range occurs when there is no dominant buying or selling sentiment in the market. Instead, it indicates gradually shifting trader sentiments.
Tips for Range Trading
If you want to become a successful range trader, you must get better at range trading stocks in different market conditions. The following tips can help you with this.
- A Range Needs to Be Established
Before you start range trading, you need to ensure that the support and resistance levels are not one-time occurrences. The support and resistance must each be achieved at least twice to be called a range.
- Stop Losses are Crucial
The good thing about range trading is that you have a clear upper and lower price limit. This makes it easy to set stop losses for long and short positions. Ensure that you do this for each range trade, so you can limit the downside in case the market moves unexpectedly.
- Tracking the Trading Volume is Necessary
To become a successful range trader, you need to look beyond the price. The trading volume is also important. Volume trends can help you decide when to enter and exit a range trade, depending on where most of the liquidity is concentrated in the market.
- Technical Indicators Can Make a Difference
Technical indicators like the stochastic oscillator, relative strength index (RSI) and the commodity channel index (CCI) can all help you confirm the support and resistance levels before you enter a position within the range.
Conclusion
This should give you a clear idea of the meaning of range trading and how you can trade in a market that is trending between a specified range. Even if you are a beginner, it is important to learn the nuances of range trading and get the hang of this strategy because the market does not always have a clear uptrend or downtrend. By familiarising yourself with range trading, you can attempt to profit from markets that move sideways — even when there are no significant price changes to capitalise on.
