Range trading strategy: Three Ways to Trade the Opening Range

Range trading strategy

Range trading strategy

This means the price should have reached at least two similar highs and lows without breaking above or below at any point in between. Several factors influence the prices of securities, such as the type of security and the sector where the security operates. For example, tradable instruments with fixed income demonstrate a smaller trading range than commodities and equities with high price volatility. The descending triangle is a chart pattern used in technical analysis.

Therefore, it is vital to identify and exploit lucrative opportunities in range-bound markets. You can open a free trading account when you are ready to test your favourite trading strategies. Bollinger bands– show expansion or contraction of prices over a period of time. To create a Bollinger band on a stock chart, a centerline is created using an exponential moving average. After that price channels are created by calculating one standard deviation above and one below the center line.

Range trading strategy

80% of retail investor accounts lose money when trading CFDs with this provider. It is important to note that, the volatility situation can often change abruptly, so traders must be ready to adjust their positions accordingly. It is always best to have a contingency plan in the case of erratic stock behavior. Moving averages are typically used within this approach, and it is a relatively low-risk form of trading in the market.

thoughts on “Opening Range Trading Strategy”

This leads to limited upside potential, so entries and exits need to be set up quickly. Range trading is not about direction; it is all about identifying overbought and sold conditions within the range boundaries. From interest rates to government policies to those of the central bank, engaging in fundamental analysis forms the basis of successful range trading.

Range trading strategy

But even then it’s dependent on the range bar size selected by the user. Traders around the world have learned to recognize the ranger bar advantages over the time-based charts. Now, knowing how range bar came to life will give you a much deeper understanding of this ranging indicator. Both Range bars and Renko bars remove the time element to focus on the price, isolating the trend. The first thing to note about range bar is that they take only the price into consideration. Wise traders sit on their hands and watch for the opening ranges to develop and allow the other traders to fight against each other until one side wins.

Range Trading Versus Trend Trading

With range trading, volume indicators can also help watch out for valid price breakouts. A breakout occurs when a security breaks out above its trading range. The converse term is called a breakdown which occurs when a security breaks below its trading range. In this scenario, instead of trading within the range, they wait to execute trades until a security has a breakout or breakdown from the range.

Depending on the market and trading volume, a stop run could have traders exiting at prices beyond their stop due to slippage. You can look for current ranges or find trending markets that are starting to slow down. Markets vacillate between trending, or range expansion periods and non-trending, or range contraction periods.

The trading strategy that is right for one trader may not be what’s best for another. » Visit Review 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Bollinger bands are lines applied usually two standard deviations above and below the price, indicating how volatile the market is.

Range trading is an active investing strategy that identifies a range at which the investor buys and sells at over a short period. For example, a stock is trading at $35 and you believe it is going to rise to $40, then trade in a range between $35 and $40 over the next several weeks. You might attempt to range trade it by purchasing the stock at $35, then selling if it rises to $40. You’d repeat this process until you think the stock will no longer trade in this range. The only time you’ll see more range bars printed on the charts is when we have periods of higher volatility. The most basic application of the opening range principle is that when a stock moves away from the opening range indicates that one side is stronger than the other.

Range Trading: The Basics

That being said, in most cases, it may take some time before there is enough momentum to cause a breakout or breakdown . Therefore, understanding how to effectively execute a range trading strategy can be essential to making money regardless of the market conditions. Trend traders look for periods when securities show defined price movement that is marked by a pattern resembling a series of steps. In the case of an uptrend, that pattern will be marked by higher highs and higher lows. In the case of a downtrend, it will be marked by lower highs and lower lows. These price movements are also defined by easily identifiable impulsive and corrective moves.

Forces of supply and demand can impact prices in the forex market, and this is where support and resistance enter the equation. Helping traders locate levels in which a supply and/or demand in a given currency pair may transform once lines have been crossed. Supply is the amount available at a certain price, while demand is the amount required or wanted at a specific price.

When a strong pivot points line has been breached, traders can adapt to a strategy in tandem with the new market condition. The buy signal is triggered when both the RSI bull momentum and RSI bull range are true. If, after the buy signal is triggered, one indicator turns false but the other stays true, we wouldn’t exit the position. The relative strength index is a momentum indicator used in technical analysis developed by J. Welles Wilder Jr. and introduced in his book New Concepts in Technical Trading Systems in 1978. A doji is a trading session where a security’s open and close prices are virtually equal.

Tricks of the Trade: Range Trading Strategy

The downside though is that it will reduce your potential profits on each trade. Continuation ranges are chart patterns that occur within trends. These kinds of ranges usually mark a correction against the predominant trend.

The stock does not yet indicate a breakout from either trendline, which would mark an end to the range-bound trading strategy. If a security is in a well-established trading range, traders can buy when the price approaches its support and sell when it reaches the level of resistance. Range-bound trading is a trading strategy that seeks to identify and capitalize on stocks trading in price channels. This is more common than trading in range-bound securities, but exactly the same principles apply in both cases. The fundamental strategy involves finding support and resistance zones that are closely established and trading at these levels until the breakout inevitably occurs.

Step 1. Find Our Trading Range

The prices of a product or instrument can have a massive impact on the amount demanded by the marketplace or the supply that one can get. Range trading strategy is all about placing bets when you know the outcome courtesy of the price action. Finding out the support and resistance zones is the key to a successful range trading strategy.

A range trade can be set up by identifying price floors and ceilings during a short or long-term time period. After these have been determined, the price would be monitored in relation to the range; bought at lows and sold at highs. It is important to note that range trade strategies come with some limitations that a trader must be aware of before embarking on such a route. Also that the tool is best for cases of low volatility, and horizontal trends.

There is no cap on where price can move because it is moving out and away from the range. Range trading is straightforward- you need to buy at support and sell at resistance. Every financial market has periods when prices display sideways price action. Volatility indicators will also ‘notify’ traders when a valid breakout happens in the market. For instance, the ADX will confirm a breakout with a reading above 25, whereas the bands of envelop-type indicators will diverge when high volatility returns to the market.

Part of the strong appeal of the range trade strategy lies in its sheer simplicity, making it an accessible tool even for beginners in stock trading. The idea of buying at lows and selling at highs clearly resonates with most market players. Breakout Risk –This is the most considerable risk when range trading. Price will never be contained within a range forever- it will eventually break out. Breakouts are generally strong and can lead to severe capital losses for range traders, especially if they do not use stop losses.