Trading Range Explained chart indicator example strategy Profit from Market Ranges

  1. Technical Analysis
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    3. Introduction to Technical Analysis and Assumptions
    4. Technical analysis for Profitable Trades Analyzing Open, High, Low, and Close
    5. Candlestick Charts How Line and Bar chart Enhance Market Analysis
    6. Japanese Candlesticks History, Anatomy From Ancient Japan to Global Trading Phenomenon
    7. Time Frames in Technical Analysis Unlocking the Power of Choosing the Right Interval for Successful Trading strategy
    8. Candlestick Patterns How to Identify and Interpret Trading Signals
    9. Marubozu and Bullish Marubozu Understanding What is Essential Single Candlestick Patterns for Traders
    10. Marubozu Candlestick Setting Stop Loss The Ultimate Guide to Trading Patterns
    11. Spinning Top Candlestick Navigating Downtrends A Trader’s Guide to Identifying Reversal Signals
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    13. Paper umbrella and hammer candlestick pattern Unlock Profitable Trades
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    16. Engulfing Patterns and Bullish Engulfing Signals Unlock Trading Opportunities
    17. Bearish Engulfing and Doji for Trading Success Profitable Strategies with Candlestick Patterns
    18. Multiple Candlestick Patterns Insights and Strategies Boost Your Trading
    19. Bullish Harami Candlestick Pattern for Trend Reversal Strategies
    20. Shorting Guide using the Bearish Harami Pattern Trade Reversals with Confidence
    21. Morning Star Candlestick Pattern and Gap Analysis To Maximise Your Profits
    22. Evening Star Candlestick Pattern Learn How to Identify and Trade to Boost Your Trading Success
    23. Support and Resistance Basics A Comprehensive Guide to Setting Targets and Navigate the Markets with Confidence
    24. Support and Resistance Learn How to Draw and Identify Key Levels Unlocking Trading Opportunities
    25. Support and Resistance Advanced Trading Strategy Analysing Reliability and Optimisation
    26. Volume Trends How to Leverage for Successful Trading Strategy
    27. Volume Analysis A Key Checklist for Successful Stock Trading
    28. Moving Averages A Comprehensive Guide for Trend Analysis in Stock Trading
    29. How to Use Moving Averages for Profitable Trading Strategy and Potential Opportunities
    30. Moving Average Crossover Boost Your Trading Success with A Reliable Strategy
    31. Technical indicators How to Use Technical Tools for Better Decision-Making Unlocking the Power of Trading
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    33. MACD How to Interpret and Utilize Moving Average Convergence and Divergence for Profitable Trading
    34. Bollinger Bands The Power of Indicators in Trading and checklist
    35. Fibonacci Retracements Unravelling the Power in Stock Markets
    36. Mastering Fibonacci Retracement A Step-by-Step Guide for Effective Trading
    37. Dow Theory Decoding Unveiling the Principles of Technical Analysis
    38. Dow Theory Patterns Unlocking Trading Opportunities with Double and Triple Formations
    39. Trading Range Explained chart indicator example strategy Profit from Market Ranges
    40. Flag Pattern and Range Breakout How to Capitalise Trading Beyond Boundaries
    41. Risk reward ratio Understanding RRR in Dow Theory
    42. Technical Analysis Tools for Traders Charting Software Guide Enhance Your Trading
    43. How to Select Stocks for Trading Success and Building Your Opportunity Universe
    44. Short Term Trading Unleashing the Power of Scalping Strategies
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Marketopedia / Technical Analysis / Trading Range Explained chart indicator example strategy Profit from Market Ranges

Trading Range

The extension of the double and triple formations to the concept of a range is natural in a sideways market. Without a clear trend, prices will meander and oscillate in a narrow range. This can be confounding for long-term investors who are not sure what direction the market will take. They may find this period frustrating.

The range offers traders the ability to trade long and short with reasonable precision. A cap is placed on gains by resistance while support keeps losses in check, thus creating a range-bound or trading market where buyers and sellers can find ample opportunity to capitalise on.

The illustration beneath demonstrates the stock’s typical pattern of movement.

As you can observe, the stock moved between an identifiable range of Rs. 128 to Rs. 165 multiple times. This area between these two figures is referred to as the width of the range. An easy trading strategy would be to purchase near the lower level and sell near the higher level, or alternatively, open a short at a higher point and then repurchase it near the lower point.

This chart provides a great illustration of the combination of Dow Theory and candlestick patterns. Take note of the circled candles from the left-hand side of the chart:

  1. The bullish engulfing pattern is indicating that the trend is likely to continue.
  1. Morning doji star suggests along
  1. The bearish engulfing pattern indicates that a short may be likely.
  1. The bearish harami indicates that a short is likely.

A short term trader would certainly want to take advantage of trades like these – they’re easy to spot, and bring a high likelihood of good returns. The period these ranges cover could be anywhere from a couple weeks to a couple years; the longer the duration, the wider the range.

The range breakout

It is interesting to understand why stocks trade in a range, and after extended periods of time, they often break out. Let’s explore this further.

Stocks may fluctuate between high and low prices for two main reasons.

  1. When nothing is driving the stock, there may be a trading range, until a significant stimulus – such as a quarterly/ annual result announcement, new product launch, geographic expansion, change in management, joint venture or merger/ acquisition – occurs. Under these circumstances the range can remain in play for an extended period of time.
  1. Anticipating a major corporate declaration, the stock could leap either way depending on the outcome. Until it is officially announced, both buyers and sellers will be reticent to act, leading the stock to enter a range. This range can be temporary, often ending once the event has come to fruition.

Once a stock is in the range, a breakout may be imminent. This usually indicates the beginning of a fresh trend. The direction of the breakout will likely be influenced by the trigger or event outcome. Regardless, its significance lies in the trading opportunity presented.

A trader will take a long position when the stock price exceeds resistance levels and go short when support fails.

The range can be compared to a compression chamber, where the pressure gradually grows each day. A small outlet allows the pressure to be released with considerable force – this is how breakouts occur. But traders need to take heed of the possibility of false breakouts.

A false breakout is when the catalyst behind the price movement isn’t enough to sustain a trend, often resulting from an opportunistic response to a trigger which isn’t particularly favourable. Generally, trading activity is low in such situations, and it’s likely that there aren’t any shrewd investors behind the move. As you’d expect, following such a manoeuvre, the stock will typically return to its former range.

A true breakout has two distinct characteristics:

  1. Volumes are high and
  1. Following the breakout, the rate of change of price has increased significantly.

Have a look at the chart below:

The stock attempted to break out of the range three times. However, two were unsuccessful. The first occurrence had low volumes and momentum while the second showed impressive volumes but was still unable to break away.

This 3rd breakout had all the characteristics of a classic breakout, with high levels of volume and strong momentum.


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