Range trading is a strategy that focuses on identifying potential opportunities in consolidating markets. When prices fail to make higher highs or lower lows for a period of time, a clear zone of support and resistance may form, referred to as the range.
If the momentum of the trend continues to slow, it may become more difficult to identify the primary trend, providing the potential for prices to break out in either direction.
In this article, the following topics will be covered:
- An introduction to range trading
- Technical indicators for range trading
- Managing risk in range-bound markets
For the first three quarters of the year, interest rates have continued to dominate sentiment, driving treasury yields to the highest levels since 2007.
With USD strength driving the overall market trend for assets correlated with the dollar, a few markets have continued to trade within well-defined levels of support and resistance.
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3 steps to trading ranges
Step 1: Determine the direction of the trend
Although determining the direction of the trend may seem like a simple task, it may be difficult to differentiate between the long and short - term trend. This is where multiple-time frame analysis can come in handy.
By looking at price action on a longer - term chart (the weekly or monthly), a trader may be able to get a better perspective on the direction of the primary trend. If prices are making higher highs and lows, the market is said to be in an uptrend. If prices are making lower lows and highs, the market is in a downtrend. If there is no discernible trend, the market is range - bound.
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Gold weekly chart with basic trendline
Chart prepared on TradingView
The chart above shows how gold prices rose sharply from the October 2022 low until peaking at the May 2023 high. After failing to hold above $2071, prices declined, falling into a zone of support ($1880) and resistance ($1950) that remained intact for a large portion of Q3 (from June to September).
Step 2: Measure the strength and momentum of the trend
Now that the longer-term support and resistance levels have been identified, the four - hour chart can provide further insight into the momentum and strength of the short-term trend.
One of the most common indicators used for this purpose is the relative strength indicator (RSI). The RSI is a momentum oscillator that measures the speed and magnitude of price movements. By comparing current prices to historical prices, the RSI ranges between 0 - 100.
If the RSI falls, the momentum of the downward strength is increasing and if the RSI rises, the momentum of the uptrend is increasing.
By using the RSI on a shorter time frame, the trader may also be able to gauge when prices may be entering into overbought (above 70) or oversold (below 30) territory.
Gold four-hour chart with RSI indicator
Chart prepared on TradingView
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Step 3: Identify potential entry and exit points
For gold prices in Q4, the support and resistance levels identified on the weekly chart could continue to assist in driving price action, which could influence the direction of the trend.
Since prices are currently trading below prior support, the range has temporarily been broken, with a new level of support forming around the $1800 handle. If prices move back into the prior range, traders entering into new positions can use the previous support and resistance levels to manage their risk.
A summary of a range trading strategy:
- Range trading is a strategy that is often used by scalpers who look to make a profit off of short-term moves in consolidating markets.
- Technical indicators can be used to assess the momentum and direction of the trend
- The RSI is one of the most popular indicators used in range trading
- The key areas of support and resistance that make up the upper and lower bound of the range can also be used to manage risk.
Not investment advice. Past performance does not guarantee or predict future performance.
