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What is Range Trading: Principles and Technique

18 Oct 2023

Range trading is a popular trading technique in financial markets. Traders use it to profit from price changes within a specified range or boundary. With this strategy, traders can benefit from assets that are not trending upward or downward but vary within a specific price range. 

What Is Range Trading?

Range trading, sometimes called channel trading or horizontal trading, entails spotting and taking advantage of price bands or boundaries where an asset's price fluctuates. By purchasing close to the support level (the lower limit) and selling close to the resistance level (the higher boundary) of the established range, traders who employ this strategy try to profit from the regular price swings of an asset.

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Fundamental Range Trading Principles:

  • Finding a Range: Finding a price range or channel on a price chart is the first stage in range trading. This range has reasonably steady highs and lows over an extended period. Distinct support and resistance levels must be established to define the range's borders precisely.
  • Buying Near Support: When an asset's price is nearing or touching the support level, range traders usually attempt to purchase it. The story of support signals a potential price floor where rising purchasing activity is anticipated to curb further price decreases.
  • Setting Stop-Loss Orders: Setting stop-loss orders is essential for effective risk management in range trading. Traders frequently use stop-loss orders to prevent future losses. While purchasing, these orders are put just below the support level; while selling, they are positioned just above the resistance level.

Range Trading Techniques:

  • Bollinger Bands: This technical indicator comprises a moving average and two standard deviation bands. Price may be deemed overbought, indicating a potential sell opportunity as it gets closer to the upper band. On the other hand, if the price moves toward the lower band, it can be seen as oversold, indicating a potential purchase opportunity.
  • Moving Averages: Traders can use moving averages to determine the general trend within a range. Using them, traders can decide if an asset is trading within a degree or if a breakout is more likely.
  • Relative Strength Index (RSI): RSI is a tool traders use to spot possible overbought or oversold conditions within a range.

Advantages of Range Trading:

  • Risk management: Range trading offers clearly defined support and resistance levels, enabling traders to set precise stop-loss orders and effectively manage risk.
  • Predictable Price Movements: Assets trading inside a range typically display predictable price swings, which makes it simpler for traders to make well-informed decisions.

Conclusion

Range trading is for traders hoping to profit from price changes inside clearly defined ranges or channels. Traders can benefit from the predictable price oscillations within borders by recognizing support and resistance levels, creating straightforward entry and exit points, and using risk management tactics. 

 

Related Articles:  Building Wealth Slowly: The Art of Positional Trading | Swing Trading Secrets | Maximizing Profits and Minimizing Risk with Marubozu Analysis

 

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