All markets and all time frames see price ranges occurring, and this makes range trading one of the most popular methods in binary options trading. A price range occurs when sellers and buyers experience indecision, with neither group being able to push an asset’s price past a certain low and a certain high point. The low and high points are referred to respectively as support and resistance, and a range trader will capitalise on the pattern of an asset’s price moving between the areas of resistance and support. To do this, the trader must identify the trading ranges and know which indicators will help them to choose the right type of trade.
A trading range takes place when an asset’s price moves between resistance levels and horizontal support. While it lasts, it offers a number of excellent trading opportunities, however there is a cap on the potential profits that an investor can make. Ranges are also prone to a more choppy trading experience with the asset’s price either failing to reach or overshooting the established zones of resistance and support and this can cause missed targets and losses. Therefore, it is important to ensure that a range is large enough to provide an adequate profit.
How to Define Trading Ranges
A range will occur when the asset’s price bounces off a support area a minimum of two times and an area of resistance at least twice. This creates two low points and two high points which do not need to reverse at the same precise level but should be sufficiently close to each other. A number of traders prefer to the price to reach the levels of support and resistance a minimum of three times before they call it a range.
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A horizontal line connects the 2 low points and the same holds true with the high points to define the range visually. The higher the number of times the price reaches the low and high points, the stronger the range will be and the stronger the breakout will eventually be.
Resistance and support should be views as an area and not as a single price as all of the lows and highs are not likely to occur at the same exact price. The difference between these highs therefore creates a resistance area, with the difference between the lows representing a support area.
In most ranges, there will be some price swings that do not reach the previous lows or highs with some others will overshoot them. If the prices breaks beyond its established range and then moves back within it, it is referred to as a false breakout.
Advantages and Disadvantages of Range Trading
A lasting range is able to produce numerous successful trades before a breakout finally occurs, and there are certain markets which have ranged for extended periods, sometimes years, therefore developing a strategy for range trading will usually pay off. However a long lasting range will only crop up occasionally, and when it does, other range traders will also be cashing in so it can become crowded with a number of false breakouts which results in losses. It is also not worth trading all ranges, as if they are too narrow, the profit will probably not be worth taking the risk.
Non-range traders prefer to trade trends and many investors believe that a trend has a greater profit potential because it can run on indefinitely with a possibility of obtaining a large profit. A range trader usually can only capture the range’s approximate size and therefore the profit is theoretically capped at the range’s width.
In the end, it is up to each trader to choose how to implement their strategy and whether range trading or trend trading suits them best. Often a combination of both types of trading will work best.
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- Optimal trading strategy and supply/demand dynamics. Obizhaeva, A.A. and Wang, J., 2013. Journal of Financial Markets, 16(1), pp.1-32.
- A trading strategy based on the lead–lag relationship between the spot index and futures contract for the FTSE 100. Brooks, C., Rew, A. G., & Ritson, S. (2001). International Journal of Forecasting, 17(1), 31-44.