Business

Defining range-bound markets and knowing your trading environment

A trading environment can be two things: trending or ranging. A market with a trend tends to move in a single direction, while a range-bound one tends to bounce between specific high and low prices. Furthermore, these price highs act as resistance levels that the price fails to break through. On the other hand, if the high price acts as the resistance level, then it might sound sensible that the low price serves as the significant support level that the price to breakthrough.

Range-bound markets defined

Market movements can either be ranging, sideways, or horizontal. A range-bound market is also known as the choppy market that opposes everything about the trending market. We can say that the term choppy came from ocean waves or a phone call that is not clear. Its price looks like this, hence its name. A choppy market does not seem not to have a proper direction. In a small range, the price tends to go up and down. Let us talk about some indicators that can determine ranging markets.

The ADX indicator and the ranging market

An ADX that states 25 below means that the market is ranging. As the ADX’s value lowers, the trend tends to get weaker as well.

Bollinger bands and the ranging markets

Just like typical rubber bands or any other bands, these Bollinger bands tend to contract and expand. They contract when there is less volatility and expand when there is more. As a result, traders love Bollinger bands when they make strategies for breakouts. Let us summarize that:

  • Thin and contracted bands= Low volatility and price movement in a single direction is less
  • Expanding bands = Increasing volatility and price movement in a single direction is getting more visible

In trading, it is more common to see narrow bands than wide bands that form horizontally. As a result, we can develop an idea that the Bollinger bands are contracted since prices are moving somewhere around a narrow range.

The range-bound strategy is simple. It means that the currency pair is composed of high price and low price, and in general, it trades in between those two. To buy nearby the low price means that the trader expects to take profits somewhere around the high price. On the other hand, to sell nearby the high price means that the trader wishes to take profits somewhere around the low price.

Bollinger band tool is a great tool to use but incorporating more indicators such as the stochastic oscillator or the RSI helps the trader get an idea when the market condition is oversold or overbought. This will also lead to better trading ideas.

Let us cap off our lesson with small reminders.

Yes, your trading environment is an essential factor, but a wise trader should know how to profit in a trending or ranging market. All you have to do is know and master the art of picking tops and bottoms and identifying which type of trading environment you are in to know which strategy you can apply.

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