Trading In A Ranging Market, How To Survive And Make A Profit
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Trading in a ranging market can be tough. Without a clear trend to jump on to, it can be hard to pinpoint when to enter and exit the market.
Markets are often moving sideways, and traders can do a lot of damage to their trading account in such environments.
This is especially true of traders that learned to trade in bull markets where the price is constantly on the up and up.
But there are ways to trade in a ranging market. It is still possible to make a profit. Some traders profit more in a ranging market than a trending one.
In this article, we’ll look at different ways to trade in a ranging market. Trading in a ranging market doesn’t have to be boring!
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Support and resistance
One of the first things any trader when trading in a ranging market should be thinking of before trying to trade a ranging market is to mark support and resistance levels.
You may not trade support and resistance, but by simply having them marked, it will give you a clearer picture of how well the market is doing.
Further to that, it can also show you potential levels the market might reach if the ranging market breaks.
But the primary thing you want to do is need to identify if the market is ‘moving sideways’ or simply ‘choppy’.
The key difference is that a sideways market has a good amount of distance between support and resistance.
If support and resistance are very close, this is considered choppy and may not be worth trading as it is too risky.
Different types of ranging market
Not all ranging markets are the same, there are different types of ranging market.
- Perfect range. This kind of range reaches support and resistance levels numerous times. The price goes up and down in a predictable pattern. When you draw support and resistance levels, it makes a clear rectangle.
- Ranging with a pattern. This kind of range appears to have some kind of direction. There may be a series of lower highs and lower lows which may suggest a downtrend may emerge. Or the opposite might be true and there are a series of higher lows and higher highs suggesting an uptrend may emerge.
- Ranging without a pattern. The opposite of a ranging market with a pattern, this type of ranging market doesn’t have any clear pattern within it. The prices don’t go up or down in a clear way.
By identifying the different type of ranging market, can make more informed trades when trading in a ranging market.
For example, a perfect range may be worth trading as you can predict with some probability of how likely prices are to go up and down again within the range.
Ranging with a pattern could also be worth trading if you trade in the direction of the potential emerging trend.
Ideally, you want to avoid choppy ranging markets without a pattern.
Ranging markets can take place between trends, and so it is important to identify the overall trend.
Trading support and resistance
If you decide to trade in a ranging market with support and resistance, the strategy is simple.
Once you have marked your levels, whenever the price reaches resistance, you want to look to sell, and whenever the price reaches support you want to buy.
Others would advise only buying or selling when support and resistance levels are breached. These act as confirmation that it is safe to buy or sell.
This trading strategy is simple and easy to perfect, that’s a huge plus because there are fewer things that can go wrong.
Remember to put stop loss around support. Ideally, put it a few pips lower than support just in case the price momentarily dips below. This way you won’t get stopped out.
Trading with channel patterns is similar to trading with support and resistance levels. In many senses, it is the same kind of trading, just that you place your levels differently.
Channel patterns are a tool that is offered on most charting software. You use them to mark the highs and lows of the market.
And again, sell on the higher level and buy on the lower level.
Channel patterns can also be used in a trending market.
Trade false breakouts
Keeping an eye out for false breakouts (sometimes called ‘fakeouts’) is a great way to trade in a ranging market.
These are usually characterised by pin bar candlesticks that stick out of support and resistance levels.
What usually happens in a fakeout is that instead of the price breaking out into a trend, it continues to range.
For break out traders, false breakouts are a trap. But for range traders, they are a blessing and present key moments to buy or sell.
Using Bollinger bands
Bollinger bands can be used to see how volatile the market is.
The top band shows you how high prices reached, and the lower band shows you how low prices reached.
If the bands are too close to each other, it can suggest that the market is too choppy, and trading is not worth it.
If the bands are very far apart, can mean the opposite; the market is too volatile to trade.
As you can probably guess, you want to buy when prices reach the lower band and sell when they reach the higher band.
Bollinger bands are a great indicator to use if want to just rely on one.
That said, you can use Bollinger bands in conjunction with support and resistance to get a better picture of how well the market is doing overall.
Trade different markets
If your usual forex pair is ranging and you don’t like the idea of trading in a ranging market, you can look at trading different pairs.
That said, don't start trading exotic pairs that you know nothing about just because they are more volatile!
You can also look into trading stocks and other market instruments, such as cryptocurrency. But again, only do so if you are sure you know enough about how to trade them.
Avoid trading altogether
Many traders don’t like trading in a ranging market at all. To them, the profits are too small, and it is too risky.
Why risk £50 on a trade when you’ll likely only get £5 back? You could lose the entire £50.
It is more important to keep your capital safe than to trade it all. Surviving is more important than winning.
Such traders are likely to either take the day off trading or wait until a trend emerges.
That said, identifying if a market is moving sideways or is choppy is purely subjective. One trader may say that support and resistance are too close while others may disagree.
Remember to also check the news and to look for potential movements in price.
Always look for confirmation that a ranging market is finishing before trading before jumping on what you think is a trend. There's always the possibility that it might not happen.
When the market stops ranging and a trend emerges, you need to change your trading strategy.
Look for triangle patterns
Those that decide to wait for a trend will likely look out for key patterns to emerge. One to look out for would be a symmetrical wedge (triangle) pattern.
A symmetrical wedge pattern is where the price of an instrument starts getting closer and closer together.
It is characterised by a vertical side at the back and two equal-sized diagonal lines.
When this happens, the market will likely break out and can go in two directions, either into a bull market or a bear market.
Volume is another key thing range traders should look out for when trading in a ranging market.
If there is a lot of trading volume, it can signify that a breakout is about to take place. Trading volume often precedes breakouts.
However, trading volume doesn’t make a distinction between buying or selling, it just means people are trading.
The market could still go either way, uptrend or downtrend. Again, look for confirmation before entering the market.
If you remember anything from this article, make it these key points
- Support and resistance levels are useful to mark out before trading in a ranging market. They work in conjunction with many other trading strategies.
- Incorporate different trading styles into your strategy. Channel patterns and Bollinger bands are a good place to start.
- Look into trading different currency pairs or markets. If you can’t find any good opportunities to trade with your regular forex pair, you can look at others.
- Some traders skip trading when the market is ranging. It is too risky for too little profit.
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