Trading In A Range Bound Market

Published by Sharekhan Education | November 22, 2022

Micky R Gala | Sharekhan Education

Since last few weeks’ markets have been devoid of direction. Traders who follow the trend religiously then this type of situation can be challenging. It happens because trends are typically short-lived, causing these traders to often enter the market at the tail end of the trend. This happened because trends either give the confirmation at the top or bottom of these sideways patterns.

Most traders would want to see a breakout of these ranges and continue trading in the trending market. These sideways or consolidation phases occur when market participants are undecided regarding the future direction of the market. In other words, demand and supply are in a balanced state. Few traders push prices outside the range before going for either selling or buying. That’s fine, except that the traders won’t find the lowest risky entry points if they wait for prices to leave the range. The reason is that prices are usually high when breaking the upper part of the range and low as they fall through the lower boundaries of the consolidation.

How to trade in a range-bound market?

An alternative way to trade in a range bound market would be to look at the bottom of the range for buying opportunities and the top of the range as a selling zone. We can find these opportunities by identifying fresh levels at the extreme boundaries of the broad range. But make sure the range is wide, as wider ranges would provide a better profit margin compared to a narrow range.

Buying at the extreme bottom of the range would provide good opportunities in the same way that selling at the top of the range produces profitable trades in range bound markets. Because a sideways pattern never lasts, the trader will exit with small losses whenever the range is reached. However, if the sideways pattern extends for a certain period, the profits from applying this strategy will increase.

There are many instances in the market where, after the breakout, prices don’t sustain further, which means they reverse. Which is also known as a false breakout due to which traders who go with traditional technical analysis get trapped. And sometimes the breakout is followed by a strong move in the same direction. Trading on this breakout is generally a high-risk strategy.

As discussed above, market trading in a wide range is never to be seen as a lazy market but rather as a great opportunity. In a sideways-trending market, the chances of finding more opportunities are higher than in an up or down trending market.

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