Range Trading is one of the safer forms of trading suitable to beginners and advanced traders. A range is an area where the prices move between a support and resistance line, as the face indecision and fail to break out of either.
What makes range trading a good choice? In a trending market, we never know where momentum driven traders will take the prices. If things go wrong in a directional bet, there is no limit to the losses that we could face. Similarly, it is difficult to define what is high or low in a trending market. But in a range, we know that anything close to the resistance line is a sell, and any price close to the support level is a buy. In short, ranges are easier to trade, understand and analyze.
The problem with range trading is that it's hard to know when they will break down. The breakdown of a range pattern tends to be violent and sharp, and if you're on the wrong side, sizable losses are possible. False breakouts are common, too.
Favorable technical tools in a range pattern include the RSI, the stochastics indicator, various other oscillators. Trading ranges by exploiting the common market formations of triangles, head and shoulders patterns, or Fibonacci analysis is also possible. Fibonacci retracement and extensions are especially suitable to analyzing various short-term trends in the context of a larger range pattern.
Range trading can be highly profitable as a general trading strategy. As with everything else, sticking to a well-defined strategy, and trading only when your standards are met will make your life easier as a range trader.
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