The market moves in different stages such as ranges, channels and trends. Ranges and trends are the most recurring among these three. Just like any pattern or indicator, there are different ways to trade a range. The concept is simple. Buy for the bottom of the range and sell from the top. However, trading a range is not as simple as it sounds. Most people know when to trade a range, but don’t know when not to. For example, people hit the buy when the market is at the bottom of the range, but sometimes it breaks below the range and stops them out. So, they do not know when not to hit the buy. Also, timing is essential when it comes to trading ranges. Entering the trade early could stop you out due to spikes and entering too late could lead to a huge stop-loss. Therefore, we can conclude that trading ranges require pure logical analysis to make money from it. In the subsequent sections of the article, we shall discuss how price action traders analyse a range.
What is a Range?
How would you define a range? A majority would say it’s a sideways movement of the market. Now, if you observe carefully, the definition of the range is more like defining a pattern. However, price action traders have a different definition for it. Well, for a price action trader, a range is the state of the market where both buyers and sellers are powerful. Basically, they consider the strength of both parties.
How price action traders look at ranges
This is where these traders stand out from the rest of the traders. Just like trends, they try bringing a story out from the range. Let us understand what sorts of ranges are they interested in.
Consider the below example. From the two lines, we can clearly see that the market is ranging. Most range traders participate in the market by buying at support and selling from resistance. However, price action traders are least interested in such ranges, due to the absence of a story. Here, the market moves up in three candles and drops down in three candles. There is nothing to make out of it. Therefore, they completely avoid such ranges.
Below is an example of a range in which the price action traders are interested in. Because here, the market takes about two legs to move between the range extremes, helping them bring a story out of it.
Bringing in logic to understand the story
Below is the chart of EUR/AUD on the 1H timeframe. At the moment the market is in an uptrend. The orange line (1.60983) represents the support and resistance line. The buyers make a record of 1.61233. Then the market starts to pull back. The price comes until the S&R line and then goes up again. But, it does not make a higher high. This means that the sellers at the resistance (1.61233) are quite strong. Also, if the buyers were strong enough, they would’ve broken the resistance and continued their uptrend. However, they were unsuccessful in doing so. Though the market is under the control of the buyers, sellers are gradually getting stronger. Therefore, we’re now working in a market where there is power on both sides, which is referred to as a range. So, we wait for the price to pull back until the S&R region, to go long. Other traders, on the other hand, hit the buy as the price breaks the resistance, and eventually get stopped out.
Moving forward, the price drops to the S&R in just five candles, indicating that the sellers quite powerful at the moment. So, we cannot hit the buy yet. The buyers shot up again, but this time left a wick on the top, signifying that the sellers are not done selling yet. So, it’s still not the right moment to go long. Observe that, after the buyers leaving a wick on the top, the sellers break below the S&R. This is the region we must look very carefully, as the market is in the demand region (buyers region). Well, the buyers did show up at the region and went back up to the bottom of the range. From this, we can conclude that the buyers are back in the game. Therefore, we can activate a buy anywhere around the bottom of the range.
A logical stop loss would be below the buyers showed up, because they were the one who prevented the sellers from coming further down.
Target / Take Profit
The first profit taking area would be at the top of the range, as that’s the sellers’ area. A beginner can close the trade at the resistance, while, a professional trader can close 50% of the positions in resistance region, move the stop loss to breakeven, and let the other 50% of the positions to fly.
The below chart depicts the result of the trade. Also, observe that the market was unable to break the resistance for a couple of times, but, this time, it was successful in doing so, which implies that our analysis was on point.
Summary to trade ranges
- Identify the overall trend of the market. For an up trending market, lean towards buying, and in a down trending market, emphasis on selling.
- Determine if the market was able to make a higher high or lower low after the first pullback. If not, then there is a possibility of a range developing.
- Carefully examine the next pullback. Allow the opposite party to slow down first, and then wait for the buyers to show their presence. As a rule of thumb, take the trade only if both the criteria are met.
- Observe how close you are to the bottom or top of the range. Execute a trade only if you’re close to the range boundaries, to have a decent reward/risk.
- Manage the trade similarly, as explained above.
Hence, following all the above steps can bring a change in your trading significantly.
Are you a Price Action trade? If yes, do you trade ranges this way or do you know a better way of doing it? Let us know in the comments below.