A strategy that involves buying as price moves to lower support levels, and selling as price moves to upper resistance levels.
Range trading is a non-directional strategy which is based on the underlying assumption that 80% of the time, price action does not trend, but rather channels. Range trading offers several advantages including simplicity, and defined risk reward parameters.
By focusing strictly on price movements and congestion points on the chart, range trading allows traders to ignore news-flow and simply concentrate on well defined areas of support and resistance.
RANGE BOUND MARKET STRATEGY
During moments of limited market volatility, an ideal opportunity presents itself to profit from the zigzag motions in the market. A range bound market is characterized by levels of higher buying pressure, known as a support, and higher selling pressure, known as a resistance. These levels create a channel, where market movement is generally concentrated within these key levels. As major support and resistance levels are defined, range traders apply the unique concept of buying at support and selling at resistance.
The fact that the market trades around 80% of the time in a range, the range bound strategy can become significantly lucrative to traders. However, traders need also to identify limitations to the strategy that arise when a pair breaks out into a strong trend. Thus, it is essential to know how to take advantage of this strategy and when are the best conditions to apply it.
There are certain currency pairs that best characterizes a range bound market, which is the number one rule to successful range trading. Usually currency pairs that do not have the USD involved in the pair, known as crosses, provide best range-bound opportunities. Underneath is a chart illustrating how a trader could have profited from applying the range bound strategy for the EUR/AUD pair towards the end of this year.
1) A range trader bought one standard lot for the EUR/AUD at 1.6610 and sold at 1.6900, amount of profit = 290 pips, multiplied by the cost of each pip, $7.64, he/she has $2,215.60 as profit.
2) The range trader then decides to place a second position to buy the pair at 1.6615 and takes profit at 1.6920, he/she made a profit of = 305 pips, multiplied by the cost of each pip, $7.64, he/she has $2,330.20 as profit.
3) For the last trade, the trader bought one lot at 1.6617 and closed at 1.6925, amount of profit= 308 pips, or $2,353.12 as profit.
TOTAL PROFIT for all 3 trades: $11,467.64
Setting-up Ranging Strategies
A range bound market offers various opportunities to profit in this market. In this example, the range trader was able to use the zigzag motion to his/her advantage, by simply identifying major support and resistance levels, and then buying at the support level and selling at the resistance. There are various technical indicators that can help determine times of entry and exit points, yet the selection of the currency pair is still the essential and the first step in employing this strategy. Some currency pairs that are known to trade in a range bound market are EUR/GBP, EUR/CHF and CHF/JPY.