A range trading strategy is a stock trading strategy that looks to take advantage of price movements between support and resistance levels. These levels can be static or dynamic and often determine past price action.
The basic premise behind this type of strategy is to buy when the security is near support and sell when it approaches resistance. This strategy can also be automated with the help of a computerized trading system.
A few key considerations go into implementing a range trading strategy.
- The first is to identify the suitable security to trade. Not all securities will exhibit the same price behaviour, so it’s essential to choose those that have a well-defined range.
- Secondly, it’s necessary to determine the appropriate buy and sell points. You can do it by analyzing past price action to identify where support and resistance levels are likely to form.
- Finally, a trader needs to have a clear exit strategy in place. It could involve setting a stop-loss order or taking profits at specific levels.
Advantages of range trading
There are several advantages of range trading:
- It’s a low-risk strategy. Since traders are only entering into trades when the security is near support or resistance, the risk is minimized.
- It’s a conservative strategy. Range trading tends to be less risky and more conservative than other stock trading strategies, such as trend trading or breakout trading.
- It’s a relatively simple strategy to learn and implement.
- It can be profitable in both rising and falling markets.
- It’s suitable for all time frames, from short-term to long-term trading.
Disadvantages of range trading
As with all trading systems you must also consider the disadvantages it presents:
- The profit potential is limited. Since range trading strategies are designed to trade within a defined range, the profits potential is limited.
- It’s susceptible to whipsaws. Whipsaws occur when the security price repeatedly moves back and forth between support and resistance levels without making any significant movement in either direction. It can lead to losses for traders who are not patient enough to wait for the security to break out of the range.
- It can be challenging to identify support and resistance levels. It can be a challenging task, especially in fast-moving markets.
- It can be a slow-moving strategy. Because traders are waiting for the security to break out of the range, this type of trading can be slow-moving.
- There is a risk of being stopped out prematurely. If the security price moves against the trader, they may get stopped out of their position prematurely.
How to trade using a range trading strategy?
There are two ways that traders can use a range trading strategy: manually or with the help of a computerized trading system.
This involves manually buying and selling the security as it moves in and out of a range. It’s essential to have clearly defined entry and exit points and a predetermined strategy for exiting trades if they go against the trader. You can use a stop-loss order to help protect against getting stopped out prematurely.
If using this type of strategy, traders may consider joining an online stock forum that offers strategies from other investors who are actively engaged in the same market.
In most cases, these forums will allow members to input their trade ideas into a software program that automatically takes trades based on predefined criteria set by the user. By joining one of these forums, traders can share their experiences with other members and learn new strategies.
Computerized Trading System
An automated trading system will automatically enter and exit trades according to the trader’s predetermined criteria. This type of system is designed to be completely hands-free to focus on other aspects of their trading business.
Several different computerized trading systems are available, so it’s essential to do your research before selecting one. Some systems are better suited for specific markets than others.
A range trading strategy can be a profitable way to trade stocks, especially in a volatile market. By identifying the suitable security to trade and using straightforward entry and exit points, traders can minimize their risk while maximizing their profits potential.