CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trend trading is a popular strategy because the price movement is quite apparent. However, contrary to what beginners believe, the financial markets range more often than they trend. The price of an asset fluctuates between a high and a low value about 75% of the time. Continuous uptrends and downtrends within a specific range create numerous opportunities for traders to take advantage of. Read on to learn all about trading range-bound markets.
The price bouncing between an upper and a lower level characterises a ranging, horizontal, or sideways market. Bullish and bearish forces are almost balanced in ranging markets.
Traders popularly use technical indicators to identify range-bound markets.
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The easiest way to identify sideways ranging markets is to draw trendlines of the highs and lows. The trendlines in a ranging market appear flatter, since the highs and lows tend to be close to each other. When the trendlines have a high slope, the market is trending.
In range-bound markets, the price bounces off the 0.5 Fibonacci retracement level. This means the 50% level either works as resistance or support.
ADX is a momentum strength indicator. It quantifies the strength of a trend. A value below 25 characterises a weak trend, which is often a ranging market. When the ADX crosses over 30, an uptrend or downtrend begins. ADX does not identify the direction of the trend. It can only indicate its strength.
The width of the BBs signals volatility in the price. Narrow or contracted bands indicate that volatility is low. There is little movement of the price in any one direction. This signals a ranging market. As the bands begin to widen, increased volatility signals the possibility of a trend setting in.
Range trading is straightforward and applicable to a diverse class of assets, including indices and forex. Derivative instruments, such as CFDs, enable traders to take advantage of rising and falling prices in ranging markets. But remember that range trading has a shorter turnaround time than trending markets.
There is always a risk of breakouts in range trading. Therefore, experienced traders employ robust risk management techniques.
Range trading is the technique of finding and capitalising on entry and exit points in consolidating markets. There are two popular ways to do this:
The price trends up or down within a range. Trading a bounce off the resistance or support levels involves identifying the exact points at which the price may bounce back within the range.
The financial markets often go into overbought or oversold territory, and price corrections bring them back within the range. However, at times, especially when there is poor acceptance of the price, a trend may begin. The price either breaches resistance to begin an uptrend or breaks out below support to start a downtrend. Traders identify such opportunities to take advantage of the beginning of a trend.
A critical aspect of trading range-bound markets is precise timing. Here’s a look at some of the popular indicators to identify entry and exit points.
Pivot points are overlay indicators that help traders identify the range and trend intensity for different timeframes. They help in the bounce-off trading strategy. Price levels are calculated by averaging intraday highs and lows and the closing price of the previous trading day. Pivot lines are mapped out to predict likely support and resistance levels for the following days.
Although traders can personalise their Pivot Point, and hence the S and R levels, most trading platforms use advanced analytics to automate these levels. Additionally, there can be multiple support and resistance levels, based on the asset class and trading strategy.
The two S and R levels mark the bounce-off ranges. If the price does not bounce off S1 and momentum is strong, it may breach S2 and a downtrend may begin. On the other hand, if momentum is weak, the price may still bounce off S2 and continue to stay in the range. Traders generally use other indicators to identify the strength of the momentum and market sentiment to speculate on the price action.
The RSI indicator is an oscillator between 0 and 100. Traders popularly use it to identify entry and exit points.
The default duration for the RSI indicator is 14 days, although traders can adjust the timeframe according to the sensitivity of their trading strategy. A 12-day RSI would reach overbought or oversold conditions much faster than a 24-day one.
When an asset is trading close to the support level, and RSI indicates an oversold market, it signals the beginning of a bullish trend. This is taken as an indication to open a long position. On the other hand, if the price is hovers around the resistance level with the RSI is in the overbought territory (above 70), and traders assess a strong downward momentum, it is taken as a signal to open a short position.
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