How to Build a Winning Range-Bound Trading Strategy

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How to Build a Winning Range-Bound Trading Strategy

Many traders spend a significant amount of time searching for and detecting trends in stock charts, hoping to benefit from the next wave. For others, though, sideways price activity might be just as profitable. When a security ceases to follow a trend and instead oscillates between two prices, it is said to be range-bound.

As the price fluctuates, it creates equal, or nearly identical, highs and lows, resulting in an upper resistance level and a lower support level. While the limited upside potential may be discouraging for those seeking to follow a trend, the relative consistency of these highs and lows may imply easy money, albeit in lesser amounts.

Effective Strategies for Trading Range-Bound Securities

To trade a range-bound security efficiently, the range must first be confirmed. This indicates that the price should have made at least two identical highs and lows without breaking above or below at any point in the middle.

Once the price channel or range has been created, the most basic trading method is to purchase around the support level and sell near the resistance level. When trading options, another alternative is to buy calls near support and puts near resistance. Assume the specified range of a stock is $5 to $10. This means that support is $5 and opposition is $10. By buying a call at the $5 support level, the trader may benefit when the price rises to $10. On the other hand, you may buy a put at the $10 barrier level and profit when the stock declines below $5.

  Trading Volatile Stocks With Technical Indicators

Because the main danger in trading range-bound stocks is being on the wrong side of a breakout, it is critical to pay careful attention to any signals that may indicate when it will occur. A trading range is just a pause before the continuation of a current trend or a time of market hesitation before opposition causes a reversal.

While it may be tempting to just place a stop-limit order at the support or resistance levels and trust the pattern, it is critical to monitor additional signs, such as trade volume, that may suggest an oncoming breakout. If the price falls below the support line, a hastily acquired call might soon become worthless. The range and the breakout might be profitable for a patient and attentive trader.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Past performance does not predict future performance. Investing entails risk, including the possibility of losing money.

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