Range Bound Trading Strategies Explained

As a trader, you probably know this rule…

Buy at support, sell at resistance. 

So, you have been trading range markets based on the above rule. 

However, things will not always work for you!

Why?

Because all support and resistance levels are not created equal. 

You cannot just buy because the market has hit support, or sell because the market has hit resistance. 

You’ll learn why in this article…

In this article, you will learn…

What is a Range-Bound Market?

A range-bound market is a condition in which the price is congested within a range on the price chart. 

The general price action is found between two specific levels, that is, the high of the range and the low of the range. 

Traders use the names Congestion Phase, Price Consolidation, and Flat Market to refer to a Range-Bound market. 

In other words, when a forex pair is not trending either upwards or downwards, it is ranging, with the price moving sideways within a horizontal channel. 

The highest point within the price consolidation is referred to as the resistance area. 

On the other hand, the lowest point within the price consolidation is known as the support area. 

The two areas should be considered as a zone, not as a fixed horizontal price. 

We use the high and the low points of the horizontal channel to visualize the state of the current range of the currency pair. 

These horizontal zones tend to occur regularly on Forex, mostly during periods of low trading volume. 

Since the volumes are low, the bears and the bulls cannot overpower each other, hence, they create a flat price action. 

Take a look at the following chart…

The above chart is an example of how a classical Range is formed. 

What you notice from the chart is that the price for the currency pair is trending when the volumes are increasing. 

On the other hand, the price is moving sideways when the volumes are low. 

Market Range Breakout

The Market Range Breakout is one of the most powerful occurrences during a flat price action. 

A Market Range Breakout is said to have occurred when the price action breaks through the lower or the upper level of the Price Range. 

This phenomenon is an indication that the price action is trying to continue the current price move in the breakout direction. 

In such a situation, you should expect the current range swing to be extended. 

In most cases, after the occurrence of a High Momentum Range Breakout, the price enters a new trend in the same direction as the break. 

Consider the chart given below…

The above chart shows a valid Market Range Breakout to the upside, which is followed by a bullish move. 

The flat lines in the chart show the flat price action, and the pair moves in a Range channel. 

The range has occurred during a relatively low volume. 

I have used a red arrow to indicate the position of the Range Breakout. 

The strong momentum candle at this position is an indication that the price is about to increase further. 

After a short while, the volume begins to increase, and the currency pair shows a strong bullish trend. This trend lasts for long!

Trading Range Bound Currency Pairs

There are price action traders capable of trading Range Bound markets more effectively. 

The reason is that the range itself gives an informed trader many price action clues. 

When the support and resistance zones within the range are combined with other chart events, they provide for high probability confluent trades. 

How to Trade Inside the Price Swings

Tight ranges present us with an opportunity to trade inside swings during the flat 

market.

Let us explore this opportunity in detail…

A trader can attempt to enter a trade any time the price bounces from the lower or upper level of the horizontal channel. 

The position should be in the same direction as the bounce. 

The trade should then be held until the price reaches the opposite side of the Range. 

To make this strategy more effective, you can use a tight stop loss order. 

The ideal place for the stop loss order is beyond the level, from which the price bounces from. 

Consider the chart given below…

The above chart shows a trading example of the Inner Swings range bound trading strategy. 

The black horizontal lines mark the low and the high levels of the range. 

The chart shows that there are times when the price action moves strongly above the range, only to revert back shortly. 

Such type of pattern is mostly formed after the release of economic news. 

Our goal is to focus on the range levels where there is a concentration of tops and bottoms. 

The pink arrows pointing into the range indicate the moments at which the market presents traders with buy and sell opportunities. 

Of course, this is determined by the range bound price action. 

The red horizontal lines show the levels of your stop loss orders. 

If the market tries to move beyond those levels, you should exit the trade. 

Once you open this kind of bounce trade, it’s good for you to hold until the price reaches the opposite level, or until when the stop loss is triggered. 

Most traders regard the Range trading approach as very risky. 

One of the reasons behind this is the lack of decent trading volumes during the range.

This causes price uncertainty since the pair can rapidly change its direction in case a bigger buyer or seller joins the market. 

How to Trade the Range Breakout

The Range trading approach provides traders with a way to benefit from a ranging market condition. 

The concept behind the range trading strategy is to enter the market when the price creates a breakthrough through the lower or upper level. 

As a trader, you should enter the market in the same direction as the breakout. 

If it’s a bearish breakout, sell the currency!

If it’s a bullish breakout, buy the currency!

When entering the trade, you simply make an assumption that the price will create a trend once it breaks out of the range.

Any valid Range breakout is accompanied by high or increasing trading volumes. 

This means that you can use the Volume indicator of the chart to confirm whether a breakout is real or not. 

When trading the Range breakout, always make sure that you use a stop los order. 

In some cases, the price will close with some candles beyond the range levels, but the price will immediately return inside the range. 

That’s why you should use a stop loss order to remain protected. 

Many are the times I place the stop in the middle of the range. 

I then pursue a target that is at least equal to the size of the range. 

This gives me the ability to achieve a Reward:Risk ratio of not less than 2:1 on this kind of trade setup. 

If the price manages to complete the size of the range, it will be good for you to consider having a portion of your position open. 

You can use the basic price action rules to get a final exit signal from the trade. 

The following chart demonstrates how to trade the Range breakouts…

In the above chart, we have used two black horizontal lines to mark the range. 

The breakout through the upper level of the range has occurred at the point we have marked as Buy. 

That is the position at which you should buy the currency pair. 

The chart also shows that the stop loss was placed at the middle of the range. 

We have then measured the size of the range which has then been used as the minimum target. These two must be of equal size. 

After the range breakout, the price reached the minimum target. 

The bullish move is shown by the red line. 

The price action has then been used as the reference point to exit the trade if there still exists an open portion of the position at that time. 

You should close the trade immediately the price action breaks the red trend line in a bearish direction. 

This trading strategy is popular among price action traders. 

However, you can still adjust it to meet your trading needs. 

How to Identify Non Trending Range Markets

As a trader, you must know whether a market is really flat or not. 

The good news is that there are technical range indicators that you can use to recognize flat markets. 

Let’s discuss them…

ADX Indicator

The ADX (Average Directional Movement Index) is a technical indicator that can help you distinguish flat price movements from trends. 

The indicator is made up of a single line that fluctuates between 0.00 and 75.00. 

If the price is below 25.00, it indicates that you are most likely in a Range Bound Market condition. 

If the ADX line crosses above 25.00 from below, it indicates that the price is most likely entering into a trend phase, which is either bearish or bullish. 

So, what is the right time to enter the market based on this indicator?

Here is the answer…

When the ADX line breaks the 25.00 line while accompanied by increasing trading volumes. 

Note that you should enter the market in the same direction as the price. 

Also, don’t forget to place a stop loss order at the middle of the range. 

Next, hold the trade until the minimum target is reached. 

You can use the price action rules to extend your profit beyond the minimum target level. 

Consider the following graphic…

In the above graphic, the bottom green line shows the ADX indicator. 

The two black horizontal lines indicate the Forex Range during low trading volumes. 

From the ADX line, you can notice that it is located below 25.00 most of its time. 

You can enter a trade once this line crosses above 25.00. 

The reason is that it indicates an end of the Range and the price is most likely to enter a new trend. 

Also, the volumes should be increasing!

Now, which direction should you enter the market?

The volume indicator and the natural price action should help you answer this question. 

If both the volume indicator and the price action are bullish, it’s time for you to buy the currency pair!

As we had stated earlier, the stop loss order should be placed in the middle of the Range. That is what we have done in the above graphic. 

Then, you should hold the trade until it reaches the minimum target, which is shown in the graphic. 

You also have the option of holding the trade for further gains. 

Also, you can use the bearish breakout through the red bullish line to close the trade. 

Bollinger Bands

Bollinger Bands can help traders distinguish Ranges from Trends. 

Bollinger Bands is a volatility based indicator. 

It is made up of two bands that go through the tops and the bottoms of the price action to create a channel. 

A 20-period Moving Average is generated at the middle. 

The volatility bands contain the price action dynamics. 

Low volatility is normally as a result of low trading volumes. 

High volatility is normally as a result of higher trading volumes.

Therefore, the Bollinger Bands indicator helps traders identify Ranges and trends. 

Tight Bollinger Bands are an indication that volatility is low and the market is quiet. 

When the two bands begin to expand, the volatility is high and the price is moving.

This is demonstrated below…

The three lines running in the same direction as the price action are the Bollinger Bands. 

What you must have observed is that when the bands are tight, the price of the currency pair is ranging. 

When the bands expand, the price enters a trend. 

Again, when the bands are tight, the price tends to be low. 

When the bands expand, the trading volume also increases and becomes higher. 

This is a confirmation of the trend!

In the above chart, a trader could have bought the currency pair when the price action breaks the upper band. This has been noted very well on the price chart, with both bands expanding. 

The increasing trading volumes have confirmed the bullish signal. 

What about the stop loss?

The best place to place the stop loss order is below the bottom that was created prior to the price increase. 

The trader could then have stayed in the trade until the price action breaks the lower Bollinger Band in a bearish direction. 

Range Trading Tips

So, let me give you 3 quick tips to help you trade the Range more effectively…

Here is the first tip…

#1: Don’t short higher lows into resistance

When trading the Range, you don’t have to buy when you see the lower highs into support. 

Here is an explanation…

When you spot higher lows into resistance, it’s a sign of strength. 

It’s an indication that the buyers are willing to buy at the higher prices. 

This means that there are high chances of the price breaking even higher.

So, don’t short at that position.

Also, shorting higher lows into resistance means that you are limiting your profit potential. 

Reason? 

Because if you were to short at the resistance, then you would expect buying pressure to come in at the previous swing low.

So…

• Don’t short when you spot higher lows into resistance, and, 
• Don’t buy when you spot lower highs into support. 

#2: Don’t Trade “Choppy” Markets

A choppy market is a market that is consolidating very quickly. Such a market is not worth trading because the distance the market moves between reversals isn’t big enough to give you a good risk to reward ratio. 

To know if a market is choppy, just zoom in the daily chart. 

Consider the following graphic…

The above chart is an example of a choppy market. 

The price action in the highlighted section is moving sideways but in a very tight range. That is how a choppy market looks like, and you should stay away from it. 

Any “choppy” market is not worth trading. 

Newbie traders tend to give back their profits shortly after big wins since the markets consolidate after making big moves. 

However, many traders keep trying to trade as the market moves into the choppy period, giving back their profits.

Consider the following example…

The above chart shows a powerful directional (down) move which is followed by a choppy price action period. 

If you try to trade a chop, it’s like you will be gambling. 

The market will first move to favor you, then it will reverse against you, whether you’re trading long or short. 

This means that your chances of profiting will be worse than random. 

Also, it may be difficult for you to handle such type of price action emotionally!

#3: Trade the power move into resistance

Whenever you are trading the range, look for a power move into support or resistance. 

This should be the case when you’re buying or selling.

If you want to short, look for a power move into resistance. 

The power move should be strong and the market should hit the resistance very quickly. 

If you see 2 or 3 big candles hitting the resistance very quickly, it’s an indication of a strong momentum. 

A strong power move into resistance is an indication that the markets wants to breathe after having moved faster within a short period of time. 

So, such a market might reverse or pullback altogether. 

The following graphic demonstrates this…

In the above illustration, the price action makes a strong power move into the resistance. 

The price takes a very short time to reach the resistance level and cut through it. 

If you need to short the highs of the Range, you can take advantage of this phenomenon. 

In case the market makes a power move into resistance, you will have a greater profit potential. 

This is not the case with higher lows into resistance. 

Once the price makes a power move, the next position where buying pressure comes in is at the start of the power move. 

It forms the original price level where the move started. 

It is also the area where buying pressure is most likely to come in. 

After making a fast move within a short period of time, it’s possible for the reversal to be equally fast towards the downside. 

Such a move gives you a larger profit potential. 

Summary:

• Always look for range-bound markets in daily charts. 
• In a Range-bound market, the price action experiences a sideways movement. 
• The price is bound between the high and the low levels of the Range. 
• The price of a Forex currency pair is either trending or ranging. 
• It’s easy to trade a Range because it has clearly stated levels. 
• A Range breakout trade setup is said to have occurred after the price action breaks the lower or the upper levels of the Range. 
• Use either the ADX or Bollinger Bands indicator to identify trading ranges. 
• When trading the Range, it’s good to place your stop loss order at the middle of the Range. 
• Your minimum target should then be equal to the size of the Range.