Home Trading strategies Price-action The Best Price-Action & Risk Management Strategy To Trade A ‘Range’

The Best Price-Action & Risk Management Strategy To Trade A ‘Range’

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What is a Range?

Market primarily moves in three different states. It moves either in the form of a range, a channel, or a trend. There are other states as well, but the mentioned ones are the most common in occurrence. In this article, we shall be discussing ranges.

In layman’s terms, the range is basically a sideways movement of the market. If we have to define it in terms of price action, it is the state of a market where the buyers and sellers are equally powerful. In a range, there is a specific price where the buyers are interested in going long and a price where the sellers are interested in going short. The buyer’s area is often referred to as a support, and the seller’s area is referred to as resistance.

How does the Range strategy work?

We know that, in a range, the market moves sideways. When the market is at the support level, the price shoots up; and when it is at a resistance level, the price drops. So, to trade a ranging market, we first determine the areas where the buyers and the sellers are located. Then, we do a thorough analysis of the market when the price reaches any of these two levels. And we accordingly anticipate ongoing long or short. To sum it up, the basic idea is to buy at the support and sell at the resistance.

How many timeframes are required to trade a Range?

Timeframes play an essential role when trading any state of the market. As a trader, only two timeframes are sufficient to trade. The first timeframe is used to determine the overall flow of the market. It gives us an understanding of the current market direction. This timeframe is called the higher timeframe or the directional timeframe. In the second timeframe, we do the complete analysis of the market, such as reading the momentum, placing the stop loss and targets, and managing the trade. Therefore, we call this timeframe as the trading timeframe or the lower timeframe.

Which two timeframes to consider?

This entirely depends on the type of trader you are. For example, if you want to trade daily, you can choose 60-min as the directional timeframe and 15-min as the trading timeframe. Similarly, if you want to trade part-time, you can prefer the 1D as your directional timeframe, and 4H as your trading timeframe.

Tools required

Well, the only tool needed to trade a range is candlesticks. Candlestick is that tool which helps traders understand the happenings in the market in just one candle. For example, if you consider the 4H timeframe; each candle in this timeframe precisely explains what all happened in 4 hours of trading. Therefore, for trading ranges, candlesticks are a must.

The concepts for trading a range

Trading a range does not mean hitting the buy/sell button whenever the price reaches a support or resistance level. There are many factors that must be considered before taking a range-trade.  Well, let’s discuss some of the factors.

  • Awareness of the overall trend

To reduce your risk, always trade in the direction of the higher timeframe.

Consider the below example. We can see that the market is in an uptrend. The orange line represents the buyer’s S&R. After breaking the S&R, the price starts to range. This indicates that the buyers are not letting the price below the S&R. Contrarily; the buyers are not able to breach the green resistance, indicating that the sellers are quite strong too. However, this does not change the fact that the overall trend is up.

  • The momentum of the market

The equally important factor is the momentum of the market. Even though you stay with the overall trend, if the momentum is not read right, your trade is least likely to perform.

In the below chart, we can see that the overall market is bullish. After reaching the resistance, the market begins to range. According to the previous point, in an uptrend, we must only look to go long. However, in this case, it is very risky and is not recommended to go long, because, every time the price touches the resistance, the sellers are dropping the market very aggressively. Also, the momentum of the buyers from the support is quite slow. This is the reason why the market could not even hold at the support the third time and eventually fell down.

How to Analyze a Range

Higher/Directional Timeframe Outlook: 

Below is the chart of EUR/GBP on the 1H timeframe. Let us consider this timeframe as the higher timeframe. Now, to determine the direction of the market, we consider the most recent S&R break.  Here, the market broke below the orange S&R, indicating that the sellers are in control of the market. This completes our analysis in this timeframe.

Trading Timeframe Analysis:

  • Above is the same chart in the 15mins timeframe, which is the trading timeframe. This is the timeframe where all of our analysis should be done.
  • Knowing that we are in a seller’s market, we must only look for selling opportunities.
  • Reading the pullback from point 1, we can see that the buyers seem to be pretty strong. So we don’t go short from point 2.
  • If we read the buyer’s momentum from point 3, the buyers started off quite strong, pulled back 90%, and again went back up to the resistance (point 4). But, this time, the buyer was very weak. Therefore, we can prepare to go short anywhere close to the resistance zone.

  • Moving forward, we cannot hit the sell from point 6, as the buyers are way too aggressive. Though the trade performed later, we should not be taking the risk.
  • From point 7, the buyers who were weak in the beginning picked up the pace and reached to point 8 quite swiftly. Now, we standby and wait for the sellers to show up. Well, we can clearly see that the buyers tried to go above the resistance level, but the sellers pushed them down pretty hard. Later, the buyers tried to go up again but failed. This confirms the presence of the sellers in the market. Therefore, we can now go for the sell.

Placement

  • Stop Loss

For a short position, stop loss above the resistance is sufficient, and for a long position, a stop loss below the support will be fine.

Note: The stop loss will hold well only if your entry is precise. If you enter the trade early or late, you are likely to get stopped out.

  • Take Profit (TP)

Placing take profit in a range-trade is quite simple. For a long trade, place your target at the resistance, and for short trade, a take profit at the support is quite logical.

Risk management

As much as technical analysis is important, risk management is also equally vital in trading. If you master the skill of managing your risk, you can pull out some money even if the trade goes against your direction.

Position Size for a Range Trade

  • How much to risk on each trade

Most of the successful traders out there do not usually risk more than 2% of their capital. According to them, lesser the percentage you risk, longer you will sustain in this industry. Therefore, it is recommended not to risk more than 2% of your account, for all the trades.

  • How to Calculate Your Position Size

There are several websites and apps which provide the facility to calculate your position size. However, you can calculate it manually using the following formula.

For a long position: [(Trading Portfolio size * Risk % per trade) / (Entry Price Stop Loss)] * Entry Price

For a short position: [(Trading Portfolio size * Risk % per trade) / (Stop Loss – Entry Price)] * Entry Price

Risk to Reward

The risk to Reward is basically the comparison of the return you are going to gaining with the risk you’re taking. For example, a risk/reward of 1:1 means you are risking 2% of your account to gain 2% of your account from a trade. Similarly, a risk-reward of 2:1 means you are risking 2% of your account to make 4% (2*2%). The best way to manage your risk is by taking trades whose risk-reward is at least 1:1.

When will this strategy work

There are several factors that must be considered before taking a trade. A single factor analyzed incorrectly can lead to losses. Hence, let’s point out some of the critical factors that must never be overlooked.

  • Give the highest priority to timeframes. This acts as the foundation for trading. If you mess up the direction, the complete technical analysis goes into vain.
  • Determine the strength of the trend before the range begins. If the trend is healthy, we don’t have to fear about spikes and fake-outs.
  • Studying the momentum of both parties is extremely vital, because not always the market moves according to the higher timeframe. If the momentum of the opposite party is significantly strong, it might take over the higher timeframe’s trend as well.

What might go wrong even if everything looks good

Even if you have done your analysis thoroughly, there are moments where your trade might not perform according to your expected direction. A reason for it could be any major news event.

News event: A news event can act as your friend and as your enemy as well. A friend because, when you’re in a trade and the news comes in, the market might move exactly in your direction within a few minutes. And an enemy because, when the news comes in, the market can spike you out first, and then go in your direction. Therefore, it is recommended to choose currency pairs which do not have any news on the day you are trading.

Knowing how to trade a range should be one of the most important things a trader should know. Apply this strategy the next time you trade a range and let us know if this has worked for you. Also, we would love to hear if there are other strategies you use to trade a range. Let us know in the comments below. Happy Trading!

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