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Range trade

A trading strategy that identifies stocks trading in channels. A ranging market is one in which price bounces in between a specific high price and low price. By finding major support and resistance levels with technical analysis, a trend trader buys stocks at the lower level of support (bottom of the channel) and sells them near resistance (top of the channel).

A range is a stock's lowest and highest price for a trading period. This period can be a day, a month or a year. A stock that trades within a range is said to be in a channel. Range traders buy stock at the lower end of the channel and sell at the high end, hopefully before the stock breaks out of the channel and moves in a direction unfavorable to the trader.

  1. Determine whether or not range trade is the best strategy for you. As a day trader, you must close out your position at the end of the market day. A stock may not be in the favorable end of the channel when you are forced to sell.
  2. Consider trading currencies (FX)

    . Range traders often buy and sell one stock many times over. Commissions can take a big bite out of your profits when you are trading in the stock and futures markets. However, most FX dealers don't charge commissions.
  3. Acquire direct-access software

    . This trading software allows day traders to trade directly with stock exchanges like NASDAQ and NYSE. When you are using range trading, it is important to be able to execute your trades instantly.

  1. Put tight stops into your day-trading program

    . A stop order is an order to buy or sell shares of stock when the price reaches an indicated amount. Doing so will limit any losses you might incur.
  2. Trade currencies in minilots of 10,000 units, rather than 100,000 lots, especially when you are using leverage. Currency value can fluctuate greatly during the trading day, and trading smaller means you won't risk losing as much money.

Range trading strategy

If you think you have a range trading market that you would like to trade, then your first task must be to identify the range of prices that the security is trading within. This involves determining a support level, that is a price which the security touches but doesn't go down through, and a resistance level which is similarly a price above the trading range which the price does not pass up through. You should look for the price to touch the support and resistance at least a couple of times, as this gives you some confidence that the levels are going to remain. The more these levels are touched and the price is rebuffed, the more you can trust them to perform well in the future.

The process of making a profit from the range trade is then simply to buy at the support level and sell at the resistance. You can also sell short at the resistance and buy to cover when the price drops to the support. At least, that is the range trading strategy that you're trying to apply. One point you should always watch for is that the price may 'break out' from the range, and you need to protect yourself from any losses being too great if this happens. If you watch the volume of trading, and look at the oscillators for signs of an overbought or oversold market, then you may be able to spot the warning signals for a breakout that would keep you out of the trade and perhaps allow you to plan a trade in the opposite direction.

What some people will do is let the price touch the support or resistance line, then place a buy stop order (or sell stop order) just away from the line so that it is triggered as the price starts coming back. This provides some protection against the price continuing its run right through the line, making a breakout.

As always when you place a new trade, you should set a stop loss order to prevent an adverse trade from affecting you too badly. In this case, the level is easy to see. You set your stop loss just outside the support or resistance level so that a failure of it to hold as you expect would immediately take you out of the trade for a small loss.

A range trading strategy is to short-sell financial instruments that are range-bounding. For instance lately whenever the Dow Jones has moved over the 10,600 level it has retraced back so a possibility would be to short the Dow at say, 10,650 with a stop at the 10,800 level (150 risk points). Here a range trader would target to open his short position near the top of the range using a tight stop loss and he would try to buy near the bottom levels. The Dow Jones index has tended to find support around the 10,000 mark in the past so one would look for a maximum gain of 650 points on each side of the trade.

It can be very satisfying to make a profit in a range trade, especially if you take a long position when the prices rising and follow it with a short position for coming back down. Despite the fact that the price has gone nowhere, you will be netting a good profit for the time that it remains within the range. The advantage of range trade is that you can use a very tight stop since you know exactly the support level which greatly improves the risk-reward potential and one winning trade will cover a number of losing ones.

The daytrader

Share prices charts

  1. Trading for a living
  2. Short term trading strategies
    Gaining knowledge is the first step to trading.
  3. Price action trading
  4. Range trade
  5. What is a swing trader?
  6. Follow the trend
    1. Trend following strategy
      Traders violate it surprisingly often!
  7. Initial public offering
  8. Options contract
  9. Advanced option trading strategies
  10. Futures market
  11. Exchange traded funds
  12. New fund offer
  13. Commodity trade finance
  14. Trade network
  15. How to be a successful trader?
    For those who do not know about day trading, ...
  1. How to read share price charts?
  2. Candlestick charting
  3. RSI chart

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