Range-bound market trading is a trading strategy that helps identify and capitalise on market securities like stocks and trading in price channels.
Published on 30 January 2023
Simply put, a range-bound market is a trading approach that differentiates the stocks that are trading in different channels.
By finding huge support and different resistance levels, along with connecting them with different trendlines, traders can purchase a security at the bottom of the channel (at lower trendline support) and sell it at the top of the channel (at an upper trendline resistance).
When an index or a stock trades between the support and resistance trendlines, it is termed as range-bound trading. There isn’t any strong move in either direction. Instead, the stock prices generally flow back and forth near the old highs and then fall back to the recent lows. This range-bound movement occurs at the end of large stock when the bears and the bulls fight over the directions of the next move.
Know More about Bear & Bull
The range-bound trading strategies entail the connection of reaction lows and highs with horizontal trendlines. This happens for identifying the areas of resistance and support. The reliability and strength of a trendline as an area of resistance or support depends upon the number of times the stock prices have reacted to the same.
For instance, in case the stock price has moved off the resistance trendline more than four times, it is considered more consistent than the times when the price has only moved off around two times.
Range-bound market trading occurs when the security trading is consistent between high and low prices for a certain period. The top of a stock’s trading range usually offers price resistance, while the trading range bottom generally offers price support.
Traders generally capitalise on the range-bound trading by constantly buying at the support trendline and selling the stocks at the resistance trendline till the time the security breaks out of a pricing channel.
Here, the basic idea is that the stock prices mostly rebound from certain levels rather than breaking through them. This, in turn, puts the risk-to-reward ratio in the traders’ favour. However, as a trader, you must always keep an eye on the potential breakouts or breakdowns in the stock prices.
Back-Testing – Best Range-Bound Strategy in Stock Markets
Back-testing in stocks is an essential element for brokers before actualising a trading methodology with cash. In the stock market and forex market, traders have several trading options. However, finding the right and the strongest one is indispensable. It is, however, extremely unlikely to pick up the suitability of an accessible trading methodology until you, as a trader, trade on it.
Back-testing checks the demonstration of the trading system in the documented information. It is an essential element for the tool stash of a trader. Without this, traders may find it relatively difficult to jump into the trading market. This is because before executing a trading technique, it is important to break down the market to make any crack visible to the eyes of the trader.
Also, it is essentially vital to understand how the stock market functions under different conditions. Hence, it would be safe to term that back-testing is the best range-bound market trading strategy for investors.
Also Read: Best Intraday Trading Strategies
So, now the concept of range-bound trading might be clear to you. Also, you should know that understanding this concept is vital to identify the kind of losses or gains that you may incur from your market investments.