Range trading is a strategy where traders identify securities trading between two prices, known as support and resistance levels. The strategy involves buying at the support level (bottom of the range) and selling at the resistance level (top of the range).
This approach assumes that prices will continue to oscillate between these established levels until a breakout occurs. Range traders focus on markets that lack a clear long-term trend and instead move within a bounded range.
Key tools include oscillators such as RSI and Stochastic, which help identify overbought and oversold conditions within the range. Range traders also watch for volume changes and other signs of potential breakouts.
Pros of range trading:
Range-bound markets offer multiple trading opportunities as prices oscillate within the range.
Support and resistance make for well-defined entry and exit points.
Range trading can be helpful in markets that are not trending, where other strategies may have a higher likelihood of failure.
Cons of range trading:
Profits are capped by the range boundaries, unlike trend trading, where gains can be larger.
Traders need to frequently watch the market to identify valid ranges and breakout points.
Prices can break out of the range unexpectedly or generate false signals, especially in volatile markets where prices spike.
Market suitability: Forex, stocks in sideways conditions.
Time commitment: About 1 hour per day to monitor ranges.
Recommended skill level: Beginner to intermediate.