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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
True or false: A range strategy focuses on trading within a "range" of consistent high and low prices (sideways price movement) where there is an absence of a strong trend.
Explanation
Range trading involves identifying a price range within which a financial asset is trading, then buying at the lower end of the range and selling at the upper end of the range.
Range trading strategies are also known as mean reversion strategies because:
Explanation
Another way of saying mean reversion is “return to average price,” which is a market’s tendency to default to the average price following a large move.
Trading a range entails buying at resistance levels and selling at support.
Explanation
To trade a range, traders buy an asset when the price reaches the support level, anticipating a bounce back up within the range, and then sell when the price reaches the resistance level, expecting a pullback.
Which of the following might a trader use to identify and confirm a range? Select all that apply.
Explanation
Ranges are identified based on historical price data, which is why technical analysis is so important. Some traders simply base their range trading strategy on identifying support and resistance levels on a price chart and then using them to decide when to open positions. Others will use technical indicators to confirm a range or provide buy and sell signals by pointing out when assets are overbought or oversold. Some of the most common tools used by range traders include pivot points and volatility or momentum indicators.
The CCI is a technical indicator that measures current price level relative to an average price level over a specified period of time. It stands for:
Explanation
CCI stands for Commodity Channel Index. Although it’s not specifically for range trading, traders can use the CCI for identifying overbought and oversold conditions, confirming range-bound conditions, and timing trades within trading ranges.
True or false: when trading ranges, traders will go either long or short depending on the overall direction of the trend.
Explanation
Range trading strategies allow traders to go both long and short when trading ranges, depending on the position of the price within the range.
Some of the common pitfalls of range trading are (select all that apply):
Explanation
Overtrading is tempting because range trading offers opportunity for multiple trades. However, it can lead to increased transaction costs and reduced returns, while inadequate risk management, such as setting stop-loss orders, is a common error across all trade strategies and exposes traders to excessive risk.
In which markets can you implement a range trading strategy:
Explanation
Every market can potentially experience periods of sideways trading, which is why range trading strategies are commonly applied across numerous markets, from forex to stocks, commodities, indices, or cryptocurrencies.
True or false: range traders should ignore fundamental analysis.
Explanation
While range trading primarily focuses on technical analysis and price action, fundamental analysis can provide valuable insights into potential catalysts that may cause the price to break out of the range or lead to range expansions or contractions.
A trailing stop-loss order is:
Explanation
A trailing stop follows your position when the market moves in your favour, and will lock in your profits and close the position if the market moves against you.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.
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