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Strategy Smarts Part 3: Playing the Range
Welcome to our four-part Strategy Smarts series designed to give you some practical trading templates which build on the concepts outlined in our Day Traders Toolbox and Power Patterns series.
In Part 3, Playing the Range we look at strategies for tackling choppy, rangebound markets. These are markets with plenty of noise and randomness – markets that can chop you to pieces if you’re trying to trade breakouts or be rich hunting grounds for those who know how to effectively time reversals.
We’ll run through; what trading ranges look like in real world trading and provide you with simple yet robust techniques for trading them with consistency.
Understanding Trading Ranges
A trading range reflects a market that is in a state of equilibrium – there is a broad balance between buyers and sellers.
In general, trading ranges see prices oscillate sideways around a moving average. In a trading range price behaves like a rubber band, the further it moves away from a moving average, the higher the propensity to snap back and revert to the mean.
Trading ranges occur far more frequently than trends, so it is essential that you know how to identify them in real world conditions, and how to know when the rubber band is stretched enough to tip the probability of success in your favour.
3 Types of Trading Range:
In the real world, markets are messy and full of noise. If you’re expecting your trends to be at perfect 45-degree angles and ranges to ping pong precisely between support and resistance, you won’t be equipped to place many trades.
With this in mind, it is best to think of trading ranges in three broad categories; Box, Expanding, and Contracting. Let’s take a look at the key characteristics of these three types:
1. Box Range
This is your text-book sideways range with clearly defined levels of support and resistance.
However, in the real-world reversals at support and resistance are very messy and therefore it is best to think of the parameters of the box range as broad zones.
Out of the three types of trading ranges, box ranges tend to offer the cleanest trade setups as it is relatively more straightforward to define levels of risk and reward.
Key feature: Support and resistance levels are broadly horizontal.
Top Tip: At the extremes of the range, the distance between the highest close and highest high can define your resistance zone, the lowest close to lowest low can define your support zone.
Example: FTSE 100 1hr Candle Chart
Past performance is not a reliable indicator of future results
2. Expanding Range
As the name suggests, an expanding range occurs when prices are oscillating sideways but swinging to every greater extremes on both sides of the moving average.
An expanding range represents an increase in volatility, making it far harder for traders to define levels of risk and reward than a box range.
Key feature: Support is getting lower and resistance is getting higher.
Top Tip: Use trendlines to map the expansion of the range.
Example: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
3. Contracting Range
Contracting ranges effectively ‘funnel’ the market into an apex. They represent a contraction in volatility and tend to occur when trends take a pause for breath and consolidate.
A contracting range can often present a prime trading opportunity for trend traders to position themselves within a longer-term trend at attractive levels of risk/reward.
Key feature: The range is getting progressively narrower.
Top Tip: Zoom out and look for a higher timeframe trend. If the market is trending on the higher timeframe, only take trades within the contracting range that are in the direction of the higher timeframe trend.
Example: EUR/USD 4hr Candle Chart
Past performance is not a reliable indicator of future results
Strategies for Playing the Range
Now, let's delve into two robust trading strategies tailored for navigating range-bound markets:
VWAP Bands Day Trade:
Day Traders need to identify a range bound market quickly and then look for trading opportunities at the extremes of the range.
A great tool for doing this is VWAP (Volume Weighted Average Price) which combines both price and volume data to provide a weighted average, reflecting not just where a market has traded but also the volume at each price level.
An upper and lower band can be placed 2 standard deviations above and below the VWAP line. When price moves outside of the bands in a range bound market, probabilities are tipped in favour of mean reversion.
Reversal candle patterns, such as engulfing candles, pin-bar candles, and double-top/bottom’s that form outside of the bands can create the entry trigger. Traders will then target mean reversion – a move back to VWAP.
For more information on trading with VWAP see Day Trader's Toolbox Part 2: VWAP (see link at the bottom of the page).
Example 1: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
Example 2: Apple (AAPL) 1min Candle Chart
Past performance is not a reliable indicator of future results
Fakeout Swing Trade:
Swing Traders aim to take a ‘clean swing’ of price action out of the market, typically holding trades between 2-5 sessions.
A robust swing trading method in range bound markets is to look for fakeout’s at the extremes of the range.
The term ‘fakeout’ is trading slang for false breakout, the fakeout pattern occurs when price breaches the extremes of the range only to snap back quickly (within one or two candles).
The beauty of the fakeout is that it clearly defines the risk parameters on the trade – stops can be placed above or below the fakeout. Swing traders can choose to hold for a move back to the top of the range, or take partial profits at a defined mid-point or moving average.
Fakeout trades tend to work best in a box range as levels of support and resistance are clearly defined – making it much easier to identify the fakeout.
For more information on the fakeout pattern see Power Patterns: How to Trade the Fakeout (see link at the bottom of the page).
Example 1: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Example 2: FTSE 100 Hourly Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
Continued Learning:
https://www.tradingview.com/chart/TSLA/x22SJc1v-Day-Trader-s-Toolbox-Part-2-VWAP/
https://www.tradingview.com/chart/AAPL/AeBhXiLA-How-to-Trade-the-Fakeout/
In Part 3, Playing the Range we look at strategies for tackling choppy, rangebound markets. These are markets with plenty of noise and randomness – markets that can chop you to pieces if you’re trying to trade breakouts or be rich hunting grounds for those who know how to effectively time reversals.
We’ll run through; what trading ranges look like in real world trading and provide you with simple yet robust techniques for trading them with consistency.
Understanding Trading Ranges
A trading range reflects a market that is in a state of equilibrium – there is a broad balance between buyers and sellers.
In general, trading ranges see prices oscillate sideways around a moving average. In a trading range price behaves like a rubber band, the further it moves away from a moving average, the higher the propensity to snap back and revert to the mean.
Trading ranges occur far more frequently than trends, so it is essential that you know how to identify them in real world conditions, and how to know when the rubber band is stretched enough to tip the probability of success in your favour.
3 Types of Trading Range:
In the real world, markets are messy and full of noise. If you’re expecting your trends to be at perfect 45-degree angles and ranges to ping pong precisely between support and resistance, you won’t be equipped to place many trades.
With this in mind, it is best to think of trading ranges in three broad categories; Box, Expanding, and Contracting. Let’s take a look at the key characteristics of these three types:
1. Box Range
This is your text-book sideways range with clearly defined levels of support and resistance.
However, in the real-world reversals at support and resistance are very messy and therefore it is best to think of the parameters of the box range as broad zones.
Out of the three types of trading ranges, box ranges tend to offer the cleanest trade setups as it is relatively more straightforward to define levels of risk and reward.
Key feature: Support and resistance levels are broadly horizontal.
Top Tip: At the extremes of the range, the distance between the highest close and highest high can define your resistance zone, the lowest close to lowest low can define your support zone.
Example: FTSE 100 1hr Candle Chart
Past performance is not a reliable indicator of future results
2. Expanding Range
As the name suggests, an expanding range occurs when prices are oscillating sideways but swinging to every greater extremes on both sides of the moving average.
An expanding range represents an increase in volatility, making it far harder for traders to define levels of risk and reward than a box range.
Key feature: Support is getting lower and resistance is getting higher.
Top Tip: Use trendlines to map the expansion of the range.
Example: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
3. Contracting Range
Contracting ranges effectively ‘funnel’ the market into an apex. They represent a contraction in volatility and tend to occur when trends take a pause for breath and consolidate.
A contracting range can often present a prime trading opportunity for trend traders to position themselves within a longer-term trend at attractive levels of risk/reward.
Key feature: The range is getting progressively narrower.
Top Tip: Zoom out and look for a higher timeframe trend. If the market is trending on the higher timeframe, only take trades within the contracting range that are in the direction of the higher timeframe trend.
Example: EUR/USD 4hr Candle Chart
Past performance is not a reliable indicator of future results
Strategies for Playing the Range
Now, let's delve into two robust trading strategies tailored for navigating range-bound markets:
VWAP Bands Day Trade:
Day Traders need to identify a range bound market quickly and then look for trading opportunities at the extremes of the range.
A great tool for doing this is VWAP (Volume Weighted Average Price) which combines both price and volume data to provide a weighted average, reflecting not just where a market has traded but also the volume at each price level.
An upper and lower band can be placed 2 standard deviations above and below the VWAP line. When price moves outside of the bands in a range bound market, probabilities are tipped in favour of mean reversion.
Reversal candle patterns, such as engulfing candles, pin-bar candles, and double-top/bottom’s that form outside of the bands can create the entry trigger. Traders will then target mean reversion – a move back to VWAP.
For more information on trading with VWAP see Day Trader's Toolbox Part 2: VWAP (see link at the bottom of the page).
Example 1: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
Example 2: Apple (AAPL) 1min Candle Chart
Past performance is not a reliable indicator of future results
Fakeout Swing Trade:
Swing Traders aim to take a ‘clean swing’ of price action out of the market, typically holding trades between 2-5 sessions.
A robust swing trading method in range bound markets is to look for fakeout’s at the extremes of the range.
The term ‘fakeout’ is trading slang for false breakout, the fakeout pattern occurs when price breaches the extremes of the range only to snap back quickly (within one or two candles).
The beauty of the fakeout is that it clearly defines the risk parameters on the trade – stops can be placed above or below the fakeout. Swing traders can choose to hold for a move back to the top of the range, or take partial profits at a defined mid-point or moving average.
Fakeout trades tend to work best in a box range as levels of support and resistance are clearly defined – making it much easier to identify the fakeout.
For more information on the fakeout pattern see Power Patterns: How to Trade the Fakeout (see link at the bottom of the page).
Example 1: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Example 2: FTSE 100 Hourly Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.
Continued Learning:
https://www.tradingview.com/chart/TSLA/x22SJc1v-Day-Trader-s-Toolbox-Part-2-VWAP/
https://www.tradingview.com/chart/AAPL/AeBhXiLA-How-to-Trade-the-Fakeout/
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