Many traders spend a good portion of time looking for and identifying trends in stock charts, hoping to ride the next wave to profit. However, for some, sideways price action can be just as lucrative. When a security stops following a trend and instead oscillates between two prices, it becomes range-bound.
As the price bounces back and forth, it establishes identical, or nearly identical, highs and lows, creating an upper resistance level and a lower support level. While the limited upside potential may be frustrating for someone looking to ride a trend, the relative predictability of these highs and lows can mean easy money, albeit in smaller quantities.
Effective Strategies for Trading Range-Bound Securities
To effectively trade a range-bound security, it is essential to first confirm the range. This means the price should have reached at least two similar highs and lows without breaking above or below at any point in between.
Once the range, or price channel, is established, the simplest trading strategy is to buy near the support level and sell near the resistance. Alternatively, when trading options, one could purchase calls near support, and purchase puts near resistance. To illustrate, say a stock's defined range is $5 to $10. This would mean support is at $5, and resistance is at $10. By purchasing a call near the support level at $5, the trader can profit when the stock rebounds to $10. The flip side would be to purchase a put near the $10 resistance level, and secure a profit when the stock price drops to $5.
Since the chief risk inherent in trading range-bound stocks is being on the wrong side of the breakout, it is important to pay close attention to any clues that might hint at when it will occur. Generally, a trading range is merely a pause before the continuation of a current trend or a period of indecision in the market before opposition forces a reversal.
Therefore, while it is tempting to simply set a stop-limit order near the support or resistance levels and trust the pattern, it is crucial to pay attention to other indicators, such as trading volume, that may indicate an impending breakout. If the price breaks downward through the support level, a prematurely purchased callcanquickly be rendered worthless. A patient and conscientious trader can profit from the range and the breakout.
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FAQs
Effective Strategies for Trading Range-Bound Securities
Once the range, or price channel, is established, the simplest trading strategy is to buy near the support level and sell near the resistance. Alternatively, when trading options, one could purchase calls near support, and purchase puts near resistance.
Is 90% win rate possible in trading? ›
Achieving a trading strategy with a success rate of 90% is theoretically possible, but it is highly challenging and often unrealistic in practice. Here are some key points to consider: 1.
What is the simplest most profitable trading strategy? ›
One of the simplest and most widely known fundamental strategies is value investing. This strategy involves identifying undervalued assets based on their intrinsic value and holding onto them until the market recognizes their true worth.
What is the best indicator for range trading? ›
Below are 5 technical indicators that you can use for identifying range-bound markets:
- Average True Range. The Average True Range (ATR) is a measure of volatility that looks at a security's price activity over a set period. ...
- Bollinger Bands. ...
- Donchian Channel. ...
- IV Skew. ...
- Index PCR OI.
Best trading strategies
- Trend trading.
- Range trading.
- Breakout trading.
- Reversal trading.
- Gap trading.
- Pairs trading.
- Arbitrage.
- Momentum trading.
The short answer will be no. There simply isn't a 100% winning strategy in forex. What works in a specific market at a specific moment may not be replicated or repeated to bring the same results. Trading forex is risky and complicated, and no strategy can guarantee consistent profits.
What is 90% rule in trading? ›
According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
Is there a trading system that can win 100% of the trades? ›
There is no such thing as a trading plan that wins 100% of the time. After all, losses are a part of the game.
What is the most successful trading pattern? ›
Some of the most successful chart patterns in trading include the Head and Shoulders pattern, Double Top and Double Bottom patterns, Triangle patterns, the Cup and Handle pattern, and the Flag and Pennant patterns.
What is the 2 hour trading strategy? ›
The two-hour-a-day trading plan involves executing transactions during the first and last hours of the trading day. Volume tends to jump during these two hours of the day. Setting limit orders allows you to profit from swings during these key trading hours.
Williams Alligator FAQ
Forex Alligator strategy is a technical indicator that the market stages: trend, flat, the end of flat. The technical indicator generates trading signals to open a position to buy or sell at the momentum inception, providing an advantage to the trader.
What is the most consistently profitable option strategy? ›
1. Selling Covered Calls – The Best Options Trading Strategy Overall. The What: Selling a covered call obligates you to sell 100 shares of the stock at the designated strike price on or before the expiration date. For taking on this obligation, you will be paid a premium.
What is the most effective price action strategy? ›
The head and shoulders reversal trade is one of the most popular price action trading strategies as it's relatively easy to choose an entry point (generally right after the first shoulder) and to set a stop loss (after the second shoulder) to take advantage of a temporary peak (the head).
Which option selling strategy is most profitable? ›
The Call Ratio Backspread consists of two parts: selling one or more at-the-money or out-of-the-money calls and purchasing two or three calls that are longer in the money than the call that was sold. This strategy is also considered the best option selling strategy.
What is the best grid trading strategy? ›
The principle behind a successful grid trading strategy with the trend is that if the market price consistently moves in one direction, your position to capitalize on it gets larger. As the price rises, the grid triggers more buy orders causing your position to grow.
