Technical indicators may help a trader navigate a period of range-bound trading, or when a stock oscillates between an upper resistance level and a lower support level, successfully.
Before a trader can earn from range trading, he or she must detect the absence of a meaningful trend and the likelihood that price will continue to move back and forth inside a horizontal channel. The average directional index is a useful predictor of the presence (or lack thereof) of a trend (ADX).ADX scores over 25 are said to indicate the presence of a strong trend. Readings that stay below 25 may signal a trendless market that will remain range-bound for some time.
When a trader accurately identifies a market as range-bound, the most probable lucrative trading technique will trade price movement from the top of the range to the bottom of the range. Bollinger Bands, STARC bands, and the commodities channel index are useful indicators for identifying the top and bottom of a range while allowing for minor adjustments and changes in volatility (CCI)These indicators provide a clear picture of the current trading range and may also signal when the market starts to break out of a range by expanding or changing the slope from flat to angling up or down.
Bullish or bearish reversal candlestick patterns that appear towards the peak or bottom of a trading range might give extra trading signals for range trading. Finally, momentum indicators such as the moving average convergence divergence (MACD) may be used to spot price divergence at the extremes of the range as an indication that the market is about to flip in the other direction.
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