On an invented price path, the price turns several times between two levels and then goes through the upper one and keeps going, with a sale near the top and a purchase near the bottom each time: 5 trades are marked, 4 closed ahead and one closed behind.
A triangle marks where a trade opens and points the way it was taken. A green dot is a trade closed ahead, a red dot one closed behind. The path was invented to show how the approach behaves, including where it goes wrong. It is not market data and it proves nothing.
Also searched asrange trading strategy · trading support and resistance · sideways market strategy · fading breakouts
A description, not a recommendation
This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.
The idea
For long stretches a market goes nowhere: it rises to roughly the same level, falls to roughly the same level and repeats. Range trading treats those two levels as the edges of a box. It buys near the bottom, sells near the top, and assumes the box will hold a little longer. It is the opposite bet to breakout trading, made at the same levels.
Usually heldHours to days · others held about as long
The rule, as people usually state it
As usually stated: mark a level the price has turned down from at least twice (resistance) and one it has turned up from at least twice (support). Sell near resistance with a stop a little above it; buy near support with a stop a little below it. The target is the middle of the range or its far side. When the price closes beyond either level, the range is over and the idea is dropped.
What it needs from a market
- A sideways market with edges that have held more than once.
- A range tall enough that the distance from edge to middle is several times the spread and clearly larger than the stop.
- A clear rule for when the range has ended.
What it costs
Moderate. A trade is made each time the price reaches an edge, which may be several times a week on an hourly chart or a few times a month on a daily one. The gain on each is capped by the height of the range, so the spread takes a fixed bite from a fixed prize: the narrower the range, the larger the share. Stops just outside the edges are also where breakout orders gather, so slippage on a stop is common.
When it fails
- When the range ends. Every range does, and the last trade taken inside it is a loss.
- When the price overshoots the edge, reaches the stop and then returns inside.
- When the range narrows until the distance to the target is little more than the spread.
The mistakes people make with it
- Drawing the levels after the turns and assuming they were visible before.
- Widening the stop after a break, in the belief that the price will return.
- Trading the middle of the range, where neither edge is near.
- Treating a level as an exact price. It is a zone, and the price turns short of it or beyond it.
In the rule bench
The breakout rule done backwards, as an illustration of fading the edge of a range: short on a close above the highest high of the last 20 bars, long below their lowest low, a stop 1.5 average ranges away, a target the same distance, 1% at risk, on the example pair.
The bench uses invented random prices, on which no rule has an edge, so it shows how the rule behaves and what it costs, not whether it works.
Questions people ask
- Does range trading work?
- Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.
- How do traders know a market is ranging?
- They do not know; they judge it from what has already happened: a flat moving average, turns at similar highs and lows, no new extreme for some time. All of those describe the past. Whether the range continues is the bet.
- What is the difference between range trading and breakout trading?
- They take opposite sides at the same level. The range trader sells at the top of the range, expecting a return. The breakout trader buys a close above it, expecting a continuation. Each loses on the cases where the other gains.
The words on this page
An explanation for study. It is not advice, a recommendation or a forecast. This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.