What range trading is
Range trading buys near the lower bound and sells near the upper bound of a sideways zone, based on the idea that price will oscillate back and forth within it. Mean reversion is the broader idea: price that moves too far from its average tends to return to the average.
Core idea and when it fits
This suits a sideways market with no clear trend, when price oscillates within a relatively stable band. The strength is clear entry and exit zones; the biggest weakness is that when the market exits the band and starts a trend, a range trader can lose heavily by trading against that break.
Common mistakes
- Continuing to range-trade after the market has broken out into a trend.
- Not placing a stop outside the band, turning a break into a large loss.
- Mistaking a temporary band for a range stable enough to trade.
FAQ
- What's the biggest risk of range trading? When price breaks out and starts a trend; trading against the band then easily leads to heavy losses.
- When should I stop range trading? When there's a clear sign price has left the band, the market may have shifted into a trending state.
Checklist
- ☐ Is the market currently ranging within a stable enough band?
- ☐ Have I placed a stop outside the band in case of a break?
- ☐ Do I have a plan to stop range trading when the market shifts to a trend?