The next strategy we will add to our arsenal of actionable ideas is trading within a range. Trading range strategies involve purchasing at support and selling at resistance. In other words, purchase when price is at the lower side of the range and sell when price is at the upper side of the range. This strategy can be very difficult for some traders to execute because it involves buying into the face of selling pressure or shorting selling into the face of buying pressure. In other words, a trader must do the opposite of what the market has been doing for the past few candles.
Trading within a range is excellent method for profiting for several reasons. When a trader buys or sells within a range, he is able to clearly define his risk and in addition, he is also able to have a fairly clear grasp of his reward. By trading within a range, the trader is able to have a clearly defined point where he can admit that he is wrong and exit or reverse his trade. Also, range trading allows an opportunity in which a trader can pinpoint with some accuracy his reward from a given trade.
In the ideal market, a trader who executes range-bound trades would enter his trades at the extreme of a range. The exit for a range trade, however is slightly more complicated. In the ideal market, a trader would exit his position at the opposite end of the range, locking in a substantial profit at minimal risk.
The real world, however is not as simple as this diagram depicts. In the real world, price action is typically very choppy and price seldom remains perfectly bound within a range. The trader must protect his profits and aggressively manage range trades. When a trader initiates his trade, his initial stop should be a small distance away from the bottom of the range if he is going long or the top of a range if he is going short. A trader's first expectation of where price should travel is to the center of the range. That is, his first "profit target" should be about the midpoint of the range. A profit target is simply a location where the trader is encouraged to lock in some if not all of his profits to prevent the trade from turning into a loss. If the trader is more aggressive and believes that price has the potential to rally to the other side of the range, the trader is encouraged to maintain a tight stop to protect any and all profits should the market turn against him. Additionally, by entering a range trade, a trader may be able to catch a trend before it develops and hold his position through the ensuing trend at a more favorable price than he would have been able to achieve were he trading a breakout.
A very important thing to remember about range-bound market trading as well as all types of trading is that it is essential to follow the primary trend and trade accordingly. For example, if a trader is buying into support in hopes that a trade will bounce back into the trading range, he should only take the trade if the primary trend is upwards. If, however, price was bouncing off of resistance and he intended to short, he would not initiate this trade because the primary trend is counter to the direction he wishes to trade. By factoring in the direction of the primary trend, traders can greatly increase the likelihood of profitability in their trading.
Summary - How to Trade a Ranging Market
1. Buy at support or sell at resistance inside of a trading range
2. Place initial stop a short distance beyond the trading range on the side which the trade is executed
3. Move stop loss to break even or exit as soon as price reaches the midpoint of the range
4. Aggressively manage stop loss to prevent a profitable range bound trade from becoming a loss
5. Never trade against the primary trend