An experienced trader can choose from various strategies depending on their outlook objectives and risk tolerance. A range trading strategy is one of them. In this method, you buy and sell equities tactically over a short period.
You should thoroughly understand the risks and limitations of range trading before you attempt it. Then, plan out your strategy regarding the constraints it faces about your overall portfolio while identifying your trading goals. In this article, we have given you details on how to use range trading to attain benefits.
What is range trading?
Range trading strategy is an active investment strategy where the investor identifies a price to buy and sell over a short period. In this case, if a share starts at $55 and you believe it will rise to $60 over the next few weeks, then it’ll fluctuate between $55 and $40. Thus, it is possible to trade it by buying at $55 and selling at $60 if the value rises. If the market trades within this band for an extended period, you would repeat this process until you think it will cease to do so.
Possible ways to set up a range of trade
It may be appropriate to consider placing a buy order near a price level you have identified as a support level if you have identified a price-bound trade. A trade should be completed near a resistance price level that you have identified as a price level of resistance. You can locate your critical resistance and support levels by viewing a moving average or looking at some other price level you have identified as significant.
If you want to sell a stock at a price that is some percentage below the price you bought for (assuming you purchased it at your desired price), you may want to place a stop-limit order. You would like to determine whether or not the market is moving based on your strategy and a time frame aligned with it if you fully understand the risks of short-term investments.
Range-trade strategies might be used when the stock is trading in a range (for example, if the stock or other investment is trading in a degree). However, if it seems that the stock or additional investment is trending in one direction, then a momentum-based financial strategy is likely to be ineffective.
When trading ranges, how does volume come into play?
This type of transaction relies heavily on volume. Therefore, using volume trends to confirm patterns can often prove helpful in deciding whether this type of investment is right for you. To verify any movement, a trend-confirming volume increase is required. However, most technical analysts think that volume precedes price.
Limitations of range trading
A major significant risk that comes up with the mentioned investment strategy is that it requires precise timing, which is essential because a stock or other investments might oscillate between two prices for a specific period. Therefore, whenever you engage in this type of investing strategy, you risk losing money if the stock price doesn’t move in the direction you expect.
Range investors can benefit from regular periods when markets don’t trend. Traders can use directional trading to trade on any market, which means there are no restrictions on when they can sell. Once a particular pattern is defined, the entry and exit points are clearly defined, making it easier for the trader to invest and stop losses. In addition, the risk of a price falling dramatically on the news is reduced significantly in trend trading since smaller profits are chased over shorter time frames.