Range Trading: In-Depth Guide

Every now and then, don’t you want to go bowling with the bumpers up?

Sure, you’re not a kid anymore (unless you’re one of those child prodigies reading stock market articles online—we don’t know). It’s a little more gratifying to hit a strike with no help from bumpers at all. But every once in a while, after a long week or when you just need some validation, it can feel good to pop ‘em up and get a higher score than you’ve been used to. 🎳

In the stock and forex markets, support and resistance lines basically act as those bumpers, at least for a certain period of time. Range trading allows you to trade an asset within pretty dependable areas—if a price gets too high or two low, the bumpers will knock it back into the middle for you. 

As the U.S. copes with fears of “stagflation” despite a booming economy and rises in inflation following Biden administration’s stimuli, it can feel like a very confusing time to enter the market. Range trading might just be a way of finding some stability in your strategy while long-term judgment calls are tough to make. This guide will walk you through everything you need to decide if range trading is right for you, and to get started today if it is.

Ready? Let’s jump into it! 🚀

What you’ll learn

• What is Range Trading?
• What Determines a Trading Range?
• How to Find a Suitable Asset for Range Trading
• Best Range Trading Indicators
• Popular Range Trading Strategies
• Managing Risk and Range Trading
• Pros and Cons of Range Trading
• Get Started with a Stock Broker

What is Range Trading? 💡

All financial markets find assets falling within support and resistance lines. This means that price movements generally fall within a certain range, barring major shifts in the market or impacts from world news, such as supposed ‘melt-ups’ of the stock market as predicted by Leuthold’s Ramsey.

Say you’re looking at a price chart. You can often find a period where you can draw a line across the last few lows (the “support” line), and another across the last few highs (the “resistance” line). These lines then create a range that the asset’s price is likely to move within.

Range trading takes advantage of the opportunity that this presents. The goal of range trading is to buy an asset near the support line (its lowest point) and sell it near the resistance line (its highest point). Ideally, you’re finding support and resistance lines that are well-established and likely to continue as you see them (which we’ll discuss more later).

In this way, range trading uses assets that are showing relatively stable movement between their support and resistance lines. This is different from trend trading, where the trader seeks out assets that have great momentum in a particular direction and works to capitalize on a rising or plummeting price. 

What Determines a Trading Range? 🤔

We’ve already gone through support and resistance lines. On a relatively stable asset, these determine the trading range. However, you can also find a trading range over a particular period. Many day traders will use the range from the first half-hour of a session to set their strategies: if a price goes higher than its opening range, that might be a good time to buy. 

Of course, assets don’t always stay within their support and resistance lines, and that can give you information about an incoming trend. If the break is accompanied by a large volume in the amount of trades, this means that momentum is building. If the price goes above its previous high, that is called a breakout. A breakdown refers to a price falling below its previous lows. 

Volatility ⚠️

Finding a trading range can also be a useful way of seeing how volatile a security’s price is. More conservative investors often want to invest in stocks with smaller price fluctuations, rather than big swings in the marketplace. 

Different sectors are more and less prone to volatility, which means they will also have smaller and larger trading ranges. Utilities, telecommunications, and healthcare tend to be less volatile, while technology, commodities, and financials often have more volatility and therefore greater trading ranges.

How to Find a Suitable Asset for Range Trading 🔍

Finding the right asset and the right timing separates successful trades from big losses. It’s a challenge everyone faces: Fed Chairman Jerome Powell sold over $1 million of stock just before the market tanked in 2020, and we are now in such turbulent times that even Jim Cramer says the stock market is extremely confusing.

In range trading, there are a few ways that you can tell whether an asset is going to work well for this strategy at any given time. You want to find a market that is not trending upward or downward, but is fairly stable and fluctuating between relatively stable support and resistance lines. But how do you tell which markets are volatile and which are stable? 

Best Range Trading Indicators 💵

If you want to do research, indicators for forex, stocks, and other financial markets can be helpful tools to determine what an asset is doing. In addition to support and resistance, there are several tools that can help you decide if an asset is a good option for range trading at any particular moment. 

Moving Averages 💱

Moving averages basically work to simplify or slow down a price’s fluctuation so you can see the long-term trends. They show an asset’s average closing price over a certain period of time, like 50 days or 200 days. If the moving average is more flat, that means there is less volatility. If you’re seeing the moving average consistently going up or down, that indicates the price is trending. 

Average Directional Index 🪙

The Average Directional Index measures how strongly an asset is trending. It does not show whether the trend is going up or down—just whether it’s happening at all. If the ADX is over 25, this means the trend is strong. If the ADX is below 20, this means the trend is weak or nonexistent. Range trading works best when the asset is not trending. 

Bollinger Bands 💸

Bollinger bands express a price’s moving average as well as their fluctuations. To create the bands, the software takes the standard deviation of price-data changes over the time period, and then adds and subtracts them from the average closing price (which is the moving average). 

You thus see three lines: the moving average in the middle, and the standard deviation on either side of that. You can use this tool to determine whether a price is trending, and when a breakout might occur. 

Popular Range Trading Strategies 🧮

As the stock market closes on record highs and the dollar climbs upward, it might feel like a good time to get back in the trading world. Before you hop into the fray, it’s a good idea to understand how to approach range trading to maximize your chance of success. These key strategies will help you use market indicators to make a profit. 

Support and Resistance 🩹

If we’re starting to sound like a broken record when we’re talking about support and resistance lines, that’s only because they’re so crucial to successful range trading. These indicators show you the typical highs and lows of an asset.

There are a few ways you can tell just how strong your support and resistance lines are. One is to measure the trading volume. If you’re seeing a high volume of trades at the support and resistance lines, that indicates that they are relatively strong. 

In some cases, support and resistance become a self-fulfilling prophecy: everyone sees that everyone else believes in these lines, so they believe in them too, and thus they become real. It’s all very Tinkerbell. 

The length of time the asset has been trading within its support and resistance lines can also tell you how stable they are. After all, you need at least a few consecutive highs and lows before support and resistance lines are established at all. But if the asset has been trading within them for more than a hot minute, that implies it might just stay put.

Breakouts and Breakdowns ⚒️

Breakouts (when the asset’s price goes above the resistance line) and breakdowns (when the asset’s price goes below the support line) can also offer great opportunities for range trading. 

Sometimes, a breakout indicates that a new range is being created. In this case, you would see an increase in trading volume outside the previous range. You could choose to make a trade at this initial breakout, or you may wait until the asset settles in its new range to begin trading.

Setting Up Trades 💰

Once you have found good market conditions for range trading, you will want to purchase near the resistance line and sell near the support line. This maximizes your profit within the typical trading range. Many traders appreciate that range trading offers very clear entry and exit points for their trades. 

You can also set a stop loss just below the resistance line, and a profit target above the support line. This can help particularly in trending markets when the asset’s price might be more likely to change. 

Managing Risk and Range Trading ⚔️

Managing your risk is a crucial part of any trading strategy. Maybe you already employ some big or small risk management strategies like hedging forex, but with each strategy comes a unique set of problems and strategies. 

All financial markets are imprecise. As cool as it might be for the support and resistance lines to work exactly like the bumpers on a bowling lane, financial markets are composed of many, many human choices, so of course, things don’t work out that way.

The question then becomes: how do we deal with the knowledge that markets are not as certain as we might like them to be?

If you’re concerned about prices oscillating around the support and resistance lines, you can always just scootch them in a little bit. This can be tricky: you want the range to be wide enough that you’re making a decent profit, while being small enough that you can reliably hit your profit target. 

Since you can predict where you think the lowest and highest points of your trade will be, it’s a good idea to use limit orders. These will automatically execute the trade for you at a certain point. This means that you won’t suffer major losses if unexpected economic news or other factors cause the asset to suddenly tank.

Range trading is a particularly methodical strategy with a clear plan. It’s important that you stick to this plan, rather than making impulsive decisions based on market swings, or emotional trades based on how your other positions are doing. 

If you’re new to range trading, it’s often a good idea to practice using a demo account. Many of the top stock brokers will allow you to set up a demo account with virtual money so you can see how your trades would have done. Once you feel confident trading pretend money and you’ve honed your strategies, then you can put real cash on the table. 

The Advantages and Limitations of Range Trading ⚖️

By this point, you understand what range trading is, how to do it, what the key strategies are, and what tools you need to know in order to do it successfully. But what can you actually expect out of range trading? Who is this strategy good for, and why? 

Range trading capitalizes on stable markets that are behaving in regular ways. This might be good for traders who are looking for a straightforward strategy that they can easily calculate based on simple metrics. The exit and entry points of each trade are quite clear, so the process of making your trades and setting up stop losses is also straightforward. 

Range trading can also be done in any market, which means that you aren’t limited to specific hours of the New York Stock Exchange or anything else. It’s a great strategy for those looking for smaller profits in shorter time frames, and it’s less likely that your portfolio will take a massive hit due to a market crash or economic news. 

However, identifying a range-bound market and its breakout point can be a bit tricky. Even with experience, markets don’t always behave the way you think you will. It can also take quite a bit of time to find markets that work well for this kind of trading.

Range trading also requires a higher volume of trades, since it is a short-term form of investment. This might be more time-consuming for you, but it also means that you will end up paying more in commission fees, which cuts into your profits.

Conclusion 🏁

We’re all looking for the next big thing. Even “Big Short” investor Michael Burry is now hopping on the crypto bandwagon, along with plenty of others. As we all consider how to turn our money into more money, new strategies can help us up our game and understand how to take advantage of a variety of market conditions.

Successful range traders will put in the time and energy to find markets that work well for range trading, and be methodical in setting up their trades according to the support and resistance lines. If you can keep emotion out of your trading, check in on your indicators, and make frequent trades, you just might start raking in a profit.

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Fees

Account minimum

Starts at $3*

$0

Minimum initial deposit

$0

$0

Commissions

$0

Vary

General

Best for

New investors

Active traders

Highlight

Value-based investing

Huge discounts for high-volume trading

Promotion

$5 bonus¹

Rating

8.0/10 Visit Stash on Stash's website

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

Fees

Account minimum

$5 required to start investing

Starts at $3*

$0

Minimum initial deposit

$0 to open account

$0

$0

Commissions

$3 or $5/month

$0

Vary

General

Best for

People who struggle to save

New investors

Active traders

Highlight

“Invest spare change” feature

Value-based investing

Huge discounts for high-volume trading

Promotion

$5 bonus¹

Rating

7.0/10 Visit Acorns on Acorns' website

8.0/10 Visit Stash on Stash's website

8.0/10 Visit Interactive Brokers on Interactive Brokers' website

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.