Range Trading: Buying on Support and Selling on Resistance

The last strategy to be outlined here is suitable for a financial instrument which is trading sideways, or exhibiting trendless characteristics. This strategy is sometimes referred to as range trading. As a large part of the time you can expect markets to have no clear trend, it is useful to have a strategy that you can use even during these times. This spread betting strategy works as long as you have clearly defined support and resistance levels. These trades are short-term, going from the support to the resistance and vice versa, and the distance between these levels needs to be sufficient to make the trading worthwhile.

Range Trading

The basis of range trading is the assumption that similar to trend trading, if a market is ranging, it is likely to continue ranging. Range bound charts typically lack direction, or a trend over a defined period of time and so therefore tend to trade between support and resistances. Support and resistance in technical analysis is very important as it attempts to analyse market psychology and how market participants might react to a certain price movement once support or resistance appears.

Range Trading Markets

When an asset price sees support or resistance, technicians will often refer to the market as being “bid for” or “offered”, this means the market being bought or sold.

Once a technical breakout occurs, most investors and traders will look for a role reversal, the term used to describe support becoming resistance, and resistance becoming support. These role reversals are considered to be key to market psychology, as when a breakout occurs, technicians believe that supply and demand factors will begin to take charge of further price movements and so therefore send the asset price lower or higher.

Trading Strategy

The strategy revolves around setting buy trades when the price is approaching support and sell trades when the price is approaching a resistance level. This spread betting strategy can work several or even many times for a particular security, but inevitably it will fail with the price breaking out of the range. You need to be prepared for this, as usually when a price breaks out it does so with a lot of force which equates to moving quickly. You can use an indicator to identify pent-up demand or supply and this may give you some warning.

“If the market looks to be range trading I will buy on what looks to be a bounce off support or sell on a bounce off resistance. If the market is trending I will wait for a retracement and trade in the direction of the trend..”

Once you have found a security that is range trading, you must wait until the price approaches the support or resistance. You can place a spread bet anticipating that the price will stay within range and move to the other side. Your protective stoploss can be placed just outside the range, either below the support or above the resistance. To exit for a profit, you can use a trailing stop order, and as the price approaches the opposite side you can reduce the distance by which the order trails, in order to keep most of the profit. This trading strategy is particularly popular with new traders as it makes it easy to identify stop levels.

I was asked recently why are we seeing so many crude trades against very few gold trades, the answer is in the weekly chart, Gold is ranging like mad and these conditions are something we try to avoid trading in. Weekly charts are like a long range weather forecast and one needs to allow for that, so we want to tap our shorter timeframe trades into trends rather than tight ranges, although it looks like were trading willy nilly during the week a lot of weekend planning has gone into identifying what we will be looking at in the coming week, so gold for now has been sidelined although I’m expecting it to break out in a big way, as usually the tighter the range the bigger the break one just needs to be patient!

Tip: When analysing a technical breakout be sure that a breakout has occurred and not a retracement, which could be nothing more than a small block of trades being bought or sold. This tends to happen when there is no change in the fundamentals and volume remains low.