Range trading
Range trading practicalities
While the principles of range trading apply across various markets, traders will need to adapt their strategies to the specifics of the assets they’re trading. It’s also important to avoid some of the common pitfalls of range trading, and to implement smart risk management. These are the things we’re looking at in this lesson.
In which financial markets can I apply a range trading strategy?
The short answer is “all of them”. Every market can potentially experience periods of sideways trading. Range trading strategies are commonly applied in forex, stocks, commodities, indices, or cryptocurrencies markets. What’s important to understand is how your strategy needs to be adapted to different markets to factor in different characteristics, such as liquidity and volatility and market opening and closing times. Let’s use forex and stock markets as an example.
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Forex |
Stocks |
Market hours |
The forex market operates 24 hours a day, five days a week, meaning you have the opportunity to trade at different times. As a range trader, you need to understand the varying trading sessions and adapt your range trading strategy accordingly. For example, you may spot different price ranges and volatility levels during the Asian, European, and North American trading sessions. You’ll need to adapt your range trading strategy to account for these variations. |
Unlike the forex market, stock markets operate during specific trading hours, typically from the morning to the afternoon on weekdays. As a range trader in the stock market, you need to know the opening and closing times of the market and adjust your range trading strategy accordingly. You should also consider the effect of pre-market and after-hours trading on price movements and adapt your range boundaries accordingly. Read more about out-of-hours trading here. |
Liquidity and volatility |
The forex market is highly liquid and known for its volatility, especially during major economic releases and news events. Range traders might need to widen their range boundaries or adjust their risk management approach to accommodate higher volatility levels. On top of this, different currency pairs will have different levels of volatility and range-bound behaviour. For example, some pairs, such as EUR/USD and GBP/USD, may offer more stable and well-defined ranges suitable for range trading compared to more exotic pairs. |
Liquidity in the stock market varies depending on factors such as the size of the company, trading volume, and market capitalisation. Volatility also varies, depending on everything from company earnings releases to news events, industry-specific developments, and overall market sentiment. Stocks can experience volatility spikes during earnings seasons, corporate announcements, or geopolitical tensions. Range traders need to understand that volatility can affect the width and stability of their trading ranges. Higher volatility stocks may exhibit wider price swings, which means broader range boundaries, but also an increased risk of false breakouts. |
Market-specific factors |
The forex market typically offers high leverage compared to other financial markets, allowing traders to control large positions with a small margin deposit. Traders need to understand the way leverage can magnify both potential profits and potential losses, and be aware of margin requirements. If trading with leverage, they also need to set up strict risk management protocols to mitigate the potential for large losses. This includes setting appropriate stop-loss levels, limiting position sizes based on risk tolerance, and avoiding overleveraging. |
The stock market consists of various sectors, each with its own characteristics and behaviours. Range traders therefore need to conduct sector analysis to identify sectors exhibiting range-bound behaviour, focusing on stocks within these sectors. Range traders also need to be conscious of the way that stock prices may be influenced by corporate earnings releases, news events, and economic indicators. These can cause increased volatility and breakouts from established ranges. |
Using fundamental analysis
Fundamental analysis holds that every asset has a real, fair value, but that, at certain times, the market may not necessarily reflect the asset's true worth. This results in the price being higher or lower than it really should be, for example when traders have not yet taken account of new factors affecting asset value, such as a very recent news event.
Incorporating fundamental analysis into your range trading strategy involves considering broader economic factors, news events, and market sentiment that can influence price movements within the trading range. 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. You might want to consider:
Staying up to date on economic releases, events and key economic indicators, such as GDP growth, inflation rates, employment data, central bank decisions, and geopolitical developments
Monitoring market sentiment and investor sentiment indicators to gauge the overall mood of market participants
Paying attention to significant news events, geopolitical developments, corporate earnings releases, and industry-specific news that could impact the asset you're trading.
Keeping tabs on interest rates and monetary policy (especially in forex trading, as they can influence currency exchange rates)
Following expert analysts who cover the markets you want to trade, whose day-to-day job it is to keep updated with all of these factors.
Are there any common mistakes I should try to avoid?
Every trader gets it wrong sometimes. In fact, we have a three-part series on common trading mistakes in our course on trading psychology. When it comes to range trading specifically, here are a few common pitfalls you should try to avoid:
1. Trading against the prevailing market conditions. For example, trying to initiate trend-following trades in a ranging market or expecting breakouts when the market is consolidating.
2. Failing to accurately identify range boundaries. This can lead to poor trading decisions. You may enter trades too early or too late, resulting in losses or missed opportunities.
3. Overtrading within a range. Traders may be tempted to enter several trades within a narrow range, hoping to capitalise on small price movements, but overtrading can lead to increased transaction costs and reduced returns.
4. Inadequate risk management. We say this in almost every course on trading. When traders fail to set appropriate stop-loss levels or position sizes, they expose themselves to excessive risk.
Did you know?
When implementing risk management, you can consider using trailing stop-loss orders. A trailing stop is a stop that automatically adjusts to market movement. This means it will follow 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. Read more about trailing stop-loss orders and how to set them here.
5. Ignoring fundamental analysis. While technical analysis is critical to successful range trading, ignoring fundamental analysis can mean traders neglect to consider broader market factors, economic releases, or news events that could impact price movements within the range.
6. Lack of patience. When traders get impatient they take unnecessary risks, such as trading before accurately identifying range boundaries.
Steering clear of these problems is much easier when you implement “good trading hygiene”, such as setting a clear trading plan and sticking to it, implementing proper risk management and keeping a trade journal to assess and improve your trade performance.
You might also want to:
Assess the risk-reward ratio for each trade to ensure that potential profits outweigh potential losses. Aim for a favourable ratio (1:2 or higher) by setting profit targets at least twice the distance to the stop-loss level, and adjust your profit targets based on the size of the range and market conditions.
Diversify your trade selection to avoid concentrating your trades on a single asset or currency pair. This helps to reduce the effect of adverse price movements on your overall trading performance.
Lesson summary
Range trading strategies can be implemented in a wide variety of financial markets, but traders will need to understand the nuances of each market to adapt their strategy accordingly.
While technical analysis is at the heart of range trading strategies, fundamental analysis can be helpful too.
There are several common mistakes that traders tend to make when trading ranges, including trading impulsively, not implementing adequate risk management, failing to set accurate range boundaries and trading against prevailing market conditions.
Range traders might consider using trailing stops, which follow their position when the market moves in their favour, to help lock in any profits.
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