Range Trading Secrets

It is always more difficult to swing trade ranges as compared to swing trading trends. The reason being ranges are more difficult to identify as compared to trends. A trend is very easy to spot on the chart. The security price action will be rising steadily of falling steadily. Identifying ranges reguires the use of technical indicators known as oscillators. These oscillators are also known as non trending indicators.

So if you want to swing trade ranges, you can use the ADX (Average Directional Index) oscillator. If its value is less than 20, it means that the security is ranging. An ADX value of more than 20 means that the security is not ranging and is perhaps trending! A value of more than 30 is a sure indication that the security is trending.

There is no point in trading a range if it is not wide enough. Suppose, the stock price is moving back and forth between $55 and $60. This gives a range of $5 not good enough to even cover the trading costs like commissions that you have to pay per trade or for each buy or sell order. But if the range is wide enough something like $10, in that case range trading can be profitable as you will be able to make profit after covering the trading cost in the shape of commissions.

Now before range trading you need to determine the strength of the range. The strength of the range depends on time. The longer the trading range has been in force, the more chances are that it will continue. The more the security price touches the support or resistance, the higher chances are that these support and resistance will continue.

The support and resistance levels in the range should form a horizontal line. The more flat these two levels are, chances of a profitable range trading will be higher. Sometimes, either one or both the support and resistance are slanting. This is not a range. Flatter the support and resistance, stronger will be your conviction that the range is genuine.

How to enter a range? Use the stochastic. When the stochastic crosses the moving average from an oversold level, it is a buy signal. Place the stop loss slightly below the support or the price at which you entered the trade. Your take profit is almost the same as the range. In the above example, we had used $5 as the range. This should be your take profit. So when range trading, you buy at the support and sell at the resistance. This way, you can make nice profit!

Source : azinearticles