Range Trading Strategy – Full Explanation and Guide

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Range Trading Strategy

Binary Options Range Trading Strategy

Today, we shall examine another binary options trading strategy, which is exclusively used for trading the In/Out binary option, otherwise known as the boundary trades.

A boundary option is one trade option that gives four possible outcomes, depending on the broker that you are using. The trade outcomes are as follows:

a) Ends outside the range: Here the option is in the money if the price action is outside the selected price boundaries on expiry.

b) Ends inside the range: Here the option is in the money if the price action is inside the selected price range on expiry of the contract.

c) Stays between the price boundaries, in which case, the price action should at no time, breach any of the boundaries.

d) Goes outside the price boundaries: Where the trader needs the price action of the currency to breach the selected price boundaries just once to make a profit from the trade.

This gives the binary options trader ample opportunity to decide which trade is best for him at that point in time.

Trade Setup

The first step in using this trading strategy is to decide on the range to use. Range trading works best when the market is consolidating or in other words, when the market is trading sideways and not trending. In a trending market, rising or falling prices make it impossible to predict a price floor or ceiling, thus severely blunting the trader’s ability to profit from this trade.

The best way to detect a range-bound market is to use an indicator that shows you exactly in what direction the market is trading. One such indicator is the Bollinger band. Invented by John Bollinger, the Bollinger band has a lower band, a middle band and an upper band. The upper and lower bands show the confines of price movement in a consolidating market. Take a look at the chart below to see the illustration:

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Looking at this daily chart of the EURUSD, we can clearly see that between June 10 and 1 st September, the market was range-trading. The Bollinger bands reveal the range of prices between the price floor and price ceiling.

Once you have something like this showing on your charts, use your horizontal line tool to trace two lines as shown. You now effectively have the 2 strike prices you need for your boundary trade.

Trade Types to Execute

You can now decide on which of the four boundary trade option contract types to purchase, and set relevant expiry dates. Most brokers will allow a minimum of 7 days for expiry, so make sure that the period of consolidation will at least, exceed that time frame. If you use a daily chart like we did above in this example, you will be able to get enough time to set an expiry.

Final Note

The boundary trade is not the only binary option contract that you can trade with this strategy. You can also use this strategy to trade a Touch/No Touch option contract. The bias here should be for a No Touch option contract, taking time to set the price barrier either to the upside or downside, well outside the range of prices as demarcated by your price floor and price ceiling. This way, you are sure that the price action of the underlying asset has no chance whatsoever of coming close to your price barriers.

If you need the price action to breach the boundaries, you can adjust your price barriers accordingly to make this happen.

Best Range Trading Strategy – Trading the Price Not Time

Learn the best range trading strategy to avoid getting chopped in a ranging market. Markets spend most of their time in range zones so you need to have a trading process that embraces range trading. Throughout this guide, you’ll learn a new concept of range bars and the art of trading choppy market with the Bar Range indicator MT4.

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It’s a well-known fact that any type of market (stock, commodity, Forex currencies and cryptocurrencies) only trend for 20% of the time.

Now you might be thinking:

What’s the market doing for the remaining 80% of the time?

As you may guess, the rest of the time the markets are directionless.

The market is spending most of its time transitioning from trading ranges through retracements and other counter-trend action.

That’s why it’s important to learn how to trade range like a pro.

The 80/20 rule, also known as the Pareto principle states that 20% of the input will create 80% of the results (output). We can see how the 80/20 principle can explain market behavior. The 80/20 can also be seen in countless other instances throughout markets and the business world.

Moving forward, we’re going to spend some time introducing the concept of range bar charts and why some traders focus on range bars trading strategies.

But first, let’s understand what is range trading and why you shouldn’t be afraid of ranging markets.

What is Range Trading?

This will be a quick beginner’s guide to range trading. By taking the time to understand range trading, you’ll be able to develop a more effective trading strategy. Range trading strategies can be used in every market under almost every type of market condition.

As the name suggests, range trading is a strategy or a technique used to trade a range-bound market.

Let’s now give a comprehensive definition of what is a trading range?

A trading range takes place when a financial instrument (stocks, indices, bonds, commodities, Forex currencies or cryptocurrencies) oscillates between two upwards and downwards boundaries for a period of time.

Traditionally, the downwards and upwards boundaries are defined as support and resistance levels.

Range trading works best in the absence of a trend.

When the markets lack a clear direction, that’s when these consolidation periods settle in.

The range trading strategies seek to fade the extremes of the range.

In other words, we’re looking to buy at the bottom of the range. Inversely, we’re looking to sell at the top of the range.

Alternatively, more experienced traders can look for trading range breakouts. This type of trading strategy can give you quick profits as we’re trading on the back of strong momentum.

To open a trade inside a trading range, you need to time your entry.

Traders can time range based entries by looking for clues that the support and resistance level is going to hold. In a range market environment, the overbought and oversold indicators work the best to time the range based entry.

Now, which type of trading style you should choose between range trading vs trend trading?

It really depends on your trading goals and your personality. The trading strategy that is right for one trader may not be what’s best for another.

Remember, that your trading strategy should fit your personality.

However, you still need to be equipped with the right tools to tackle the inherent risk that comes with online trading.

So, we’re going to reveal to you how to trade ranges using the Bar Range indicator MT4.

Most traders are only familiar with trading based on bar charts or candlestick charts, which factors in the time element.

If you want to upgrade your style and learn new trading tools and techniques we’ve got your back.

Below we introduce the power of range chart.

What are Range Bars?

Range bars are a convenient replacement of the most popular types of charts (bar chart, line chart, and candlestick chart). Range bars are used in technical analysis the same way as any other form of charting technique.

These bars provide traders with a visual representation of the market price action.

For instance, with a time-based chart, each 5-minutes bar shows you the price activity for each 5-minute time period. These time-based charts will always print the same number of bars during each trading session regardless of volatility, volume or any other factor

The first thing to note about range bar is that they take only the price into consideration.

Effectively, we’re eliminating the time element. Time can always be adjusted later on.

So, how are the bars than created?

Each bar represents a specified movement of the overall price.

In other words, the range bar doesn’t close at a specific time, but instead only when a range is completed.

The size of the Forex range bar is specified by the trader.

For example, if you have a 100 pips range selected, each of these range bars is going to be equivalent to that range. So, each of these range bars is equivalent to 100 pips.

Range bars are very similar to Renko bars.

In order to use a profitable Renko strategy, you really need to understand the basic foundation of a Renko block. See here: Profitable Renko Strategy – Building your Account, One Brick at a Time.

Both Range bars and Renko bars remove the time element to focus on the price, isolating the trend.

So, what is the difference between range bars vs Renko bars?

The Renko box is printed on the chart only when the price moves all in one direction from the opening price of the previous brick.

There is no clear answer to which one is better.

Both range bars and Renko bars serve their own technical purposes. You may want to consider using both types of bars while trading.

Let me explain how range bars are formed.

Range Bars Example – How Range Bars are formed

For instance, if you select a 100 pips range bar and the EUR/USD exchange rate moves from 1.1100 to 1.1180, then 1.1180 to 1.1100, then 1.1100 to 1.1180 during a 3 day period this is what you get:

Basically, you get a bar that goes from 1.1100 to 1.1180 during a 3 day period and this bar is not closed yet.

By eliminating the time factor, we can better identify trading ranges.

Let’s go one step forward and assume the EUR/USD exchange rate has now moved to 1.1200.

In this case, the range bar closes and a new bar is printed with the opening price at 1.1200. This new bar must have a 100 pips range to close.

These range bar examples are self-explanatory.

Now, knowing how range bar came to life will give you a much deeper understanding of this ranging indicator.

Below you have a brief history of range bars:

How Range Bars Were Developed?

In 1995, Vicente M. Nicolellis Jr., a trader from Brazil, developed an innovative technique of charting price bars. The innovation of range bars came as a solution to tackle the high volatility in his local markets in Sao Paulo.

Nicolellis need a better approach, so he decided to eliminate the time element from the price chart.

Without the time variable, our famous trader from Brasil was able to focus purely on price.

As the saying goes the price is king when it comes to the market.

And, range bars bring back the focus on the underlying price movement.

Range bars are also known among professional traders as the Nicolellis range bars.

Traders around the world have learned to recognize the ranger bar advantages over the time-based charts.

When Range Bars Work the best?

Trading with range bars works the best when we have time periods of congestions or price consolidation zones. Using range bars we eliminate a lot of the day to day market noise by smoothing the price action.

See the range bar chart below:

A lot of the false signals that come with the time-based chart analysis have been eliminated.

Time-based charts will always post the same number of bars during each trading session regardless of volume, volatility or any other factors.

The only time you’ll see more range bars printed on the charts is when we have periods of higher volatility.

But even then it’s dependent on the range bar size selected by the user.

Inversely, when we have low volatility, you’ll see fewer range bars printed on the chart.

Let me give you some of the advantages that come with a range bar chart analysis.

Why you Should Trade with Range Bars?

Here are the key takeaways to keep in mind when trading with range bars:

  • All range bars are uniform in size because the range is constant
  • The size of the bar is customizable, based on the trader’s needs
  • Range bars open and closes always at the top and the bottom of the bar
  • The time period covered by each bar is irrelevant as range bar charts are time-independent

Range bars can help us identify ranging price action in a blink of an eye.

Potential support and resistance levels are more clearly visible on the chart.

If you ever struggled with trade management strategies, try using ranging bars.

Range bars are also an effective tool to time your entry and exit points.

The most important advantage of range bars chart is that by eliminating the time factor, range bars become highly effective when used in combination with other technical indicators like oscillators.

Learn more about the different types of oscillator indicators here: Best Forex Indicators to Generate Buy and Sell Signals.

Now that you’re familiar with how to calculate range bars and the advantages behind MT4 Range Bar indicator, let’s develop a range trading strategy.

Best Range Trading Strategy

In this section, you’ll learn a simple range trading strategy.

Range bars can help us identify support and resistance levels with the precision of a surgeon.

That explains why this is the best range trading strategy.

Once we have identified the support and resistance level, we let the market do his thing

Note* For the purpose of this range bar strategy we’re using a range bar size of 5 pips. This means each bar is printed once we traveled at least 5 pips in one or the other direction.

Once the resistance level is tagged by the range bar we wait for price formation that includes 3 countertrend bars.

You just need to open a new position when the fourth bar is printed on the chart.

The three consecutive countertrend bars simply show range expansion trading.

This is a clear shift in the trend direction.

Let’s zoom into the previous chart:

The protective stop-loss order can safely be placed above the 3 range bar pattern. Stop losses are one of the most effective ways for traders to control their exposure to risk.

Let’s now learn how to trade range bars using indicators.

We’re only going to use the MFI indicator.

For more info on how to use the Money Flow Index check: Money Flow Index – Trading like the Banks.

Through this range bar trading strategy we’re going to use the MFI indicator to confirm the buying and selling pressures behind the range bar expansion.

For example, when the range bar expands on the upside, we want to make sure this is due to buying activity.

We’re just using the MFI indicator as a confirmation tool.

See the range bar chart example below:

Final Words – Bar Range Indicator MT4

If you’re tired finding success with the traditional candlestick price chart you’ll find some value in doing some research and backtesting the range bar tool. If you’re looking for a more all-inclusive range trading strategy with an effective tool to time your entries and exit points you’re way better off using the Bar Range indicator MT4.

With the best range trading strategy, you have the ability to see the market structure a little bit more clearly. If the market doesn’t move, there are no trading opportunities. If there are no trade opportunities, then we can’t make money. The range bar tool helps us identify when a trading opportunity shows up.

Thank you for reading!

Feel free to leave any comments below, we do read them all and will respond.

Also, please give this strategy a 5 star if you enjoyed it!

(6 votes, average: 4.33 out of 5)

Range Trading – Quickly Learn A Simple Strategy

Last updated on December 16th, 2020

What Is Range Trading

Markets trend about 30% of the time which means the other 70% is a trading range.

When a market is trending, you will see a stair-stepping pattern of higher highs and higher lows in the case of an uptrend. There is an imbalance of buyers and sellers and you can generally see the difference between an impulse move and a corrective move.

Impulse moves are stronger and bigger in scope than a corrective move.

Once that condition stops, markets tend to find themselves range-bound – stuck between a high and a low and continue to oscillate between these two points. Buyers and sellers have found a point of relative equilibrium and you can find yourself in a very choppy environment if attempting to trade between the extremes. This will happen in any trading time frame.

Range trading ignores the overall trend direction and will trade price moves between two easily defined price levels.

  1. This instrument is trending down and puts in an obvious low at #1. For the downtrend to continue, you would need to see this low taken out to continue our pattern of lower highs and lower lows.
  2. Price rallies and when the price starts to drop, we have the top of our trading range put in.
  3. Here we have a potential higher swing low which may start the uptrend
  4. Price takes out the high which looks like a trending market

You will later see that price falls back and takes out the #3 low and you can clearly see that price is not in a trending pattern. You have the extremes of our range labeled as #1 and #2 but #4 highlights an important fact about these levels: High and low points are zones, not always specific price levels. When looking at these turns, consider them to be zones with a margin of error both outside and inside the range.

Range trading will take into account both extreme zones and a trader will look to position a trade against the potential zones of support and resistance that form the range.

Types Of Trading Ranges

When range trading, the shape of the consolidation can vary and make going long or short more difficult.

Expanding trading ranges

When you see price breakout out of both extremes and failing to trend, plus each swing is larger than the previous you get a range that is expanding. These are not something I want to take part in as the market has no clear cut consensus on what it wants to do. Also, if taking a position in this type of environment, where would you put your stop?

Being unable to define the stop on the trade can interfere with your risk profile for your trading plan.

Keep in mind that a simple breach of either extreme does not invalidate the range as the range could simply be expanding to a larger size.

This is quite different than erratic swings in each direction and while it may turn into an erratic expansion, at this point we can still find positions.

Converging range

While there are different names for each chart pattern, I keep it simple and if the market is not in a trending state, I call it simply a range-bound market.

This is the opposite of the expanding range and here price appears to zero in on a particular price point. Compression is occurring and generally, a trader will look to position themselves in the breakout of the move when it occurs.

Noting there is compression is important because when it breaks, there could be strong movement behind it. Given that, looking to fade breaks of these types of compression ranges is probably not a wise trading plan.

Using Range Trading Indicators

Trading indicators can aid in your decisions when range trading and oscillators can have a place as part of a trading plan. Let’s look at the slow stochastic trading indicator as a tool you can use when looking to trade the extremes of the range.

The extremes are marked by the circles but you can see later that the top gets exceeded in a breakout failure type of action.

At “A”, price pushes into the extreme and sets up a reversal candle. The indicator plots into the overbought area (not a signal by itself) and you have a shift in momentum which is shown by the cross of the indicator lines. It’s a combination of each event that may/may not constitute a trade.

Price drops to the lower extreme at “B” and you get an engulfing candle, an oversold indicator plus a momentum line cross.

  • Is “C” close enough to the new extreme put in at “A”?
  • Is there a reversal type of candle pattern?
  • Is there a slowing of momentum seen in the price?

Besides the indicator position, I don’t see much enticing with this trade especially since price action did not show any sign of a potential reversal. Finally, at “D” price pushes to the new extreme, shows weakness while the indicator is overbought and you see a momentum line cross.

The indicator is part of an overall range trading plan and should not be the only variable you use for making a trading decision.

Best Range Trading Strategy Outline

Simple still works in trading and the key is discipline and consistency. Without those, any type of success will be short-lived regardless of the merits of your trading system. As you head into the trading strategy, keep in mind everything you’ve covered up to here.

The best trading strategy is often the simplest.

Step 1. Find Our Trading Range

Trading ranges are formed with support and resistance zones. You can look for current ranges or find trending markets that are starting to slow down. Ranges turn to trends and trends turn into ranges.

This chart has an uptrend in play and then the price started to pullback. The high is marked off and once the pivot low is in place, that is marked as well.

For the trend to continue, you need to see a higher high. If that does not develop, you can start thinking of a range play. The chart shows that price didn’t advance into a trend continuation after the low as you put in a lower high marked “X” but fail to make a lower low.

I choose a not so perfect example of a range as showing perfection is always easy to do.

Step 2. The Location Of Price Matters

With the extremes of the range marked off, you now have areas where you can monitor what price does and if you have a trading opportunity. In our example chart, the yellow highlights areas of interest.

  1. Price revisits the low. The indicator is oversold. Momentum line cross. Inside bar candlestick.
  2. High is tested. Consolidation below extreme calls for caution. Candlesticks start showing a lack of momentum and inside pattern. Indicator oversold and cross.
  3. Price fails before an extreme test. Indicator not in the overbought zone. Good reversal pattern but no trade.
  4. The indicator in the middle zone. Bearish momentum cross. No reversal pattern. Price breaks through extreme.

We needed a price to make an attempt at the extremes. When that condition was met, we wanted to see an oversold/overbought indicator position. A bullish/bearish momentum cross helped build our case for a trade and then we needed to see a reversal pattern in the price action.

Step 3. Place The Protective Stop

You would think that placing your stop just outside of the extreme would make sense. After all, you often read that you should place the stop where you would be proven wrong.

The problem is that you can have the extreme broken and the trade (and range) is still valid. Think back to the expanded range chart and you can see that the range play is still a valid trading opportunity. The range still exists but with different extremes.

There is a pattern called a failure test that needs to break an extreme and can take you out of your current trade when you should actually be getting into a trade.

  • What about a distance away from the extreme?
  • How far is far enough?

Given that most people base their position size on their stop size, this could lead to very small positions or, depending on the market and your capital, no trade.

Inside the range? Thinking about where the majority of people put their stops (textbook stops), where do stop runs usually go?

If you know that most traders use either the extreme or a little bit beyond, those that can run the stops know that as well. Depending on the market and trading volume, a stop run could have traders exiting at prices beyond their stop due to slippage.

If you were short from the extremes and your stop was placed just outside the extreme, you’d be taken out before the trade is able to mature. If stopped out, this trade may have had slippage giving you a worse risk profile than you planned for.

If the price is going to come close to the extreme, it is probably going to test the extreme and slightly beyond. A stop just inside of the extreme will have you out of the trade before the stop runs trigger.

The fact is there is not a perfect location for the stop that will still allow an optimum position size. I use the ATR for all my stop-loss positions.

Thinking of yourself as a risk manager will aid you in your stop placement decision.

Why Range Bound Trading Works

Once a range has formed and you have determined where the extreme zones are, you now know exactly where you are to look for a trading opportunity. There’s no guesswork involved. The price will either break out of the extremes, reverse at the extremes, or expand at the extremes.

The middle of the range is not an area you want to play in.

Support and resistance levels make up the extremes of the range and S/R are zones that garner a lot of trader interest. You will have some type of action around these levels that can range from a clean test of the level to price whipping around the zone.

The key is to have a trading strategy that sets up what you are looking for and how you are going to trade it.

  • What type of price rejection are you looking for?
  • Where will you place your stop?
  • Will you use other tools to help with your decision?

Just remember that ranges end and a trend will begin. Before that happens, taking trades while in a trading range can offer up another opportunity for those looking to make money in the markets.

Range trading explained

We look at range trading, and how it can be used to provide opportunities for the times when a market is not displaying a clear trend in any one direction.

What is range trading?

Markets only trend about 30% of the time. This fact presents a problem for traders looking to capture big moves. The rest of the time markets tend to trade in a range, but what does this mean?

A trading range occurs when a market moves consistently between two prices or levels for a definitive period of time. Like trend following, which can be used on any time frame, range trading can be seen in all time frames, from short-term five-minute charts to long-term daily and monthly charts.

Unlike trend following, range trading sees traders going both long and short (at different times) depending on the position of the price within the range. Usually in trend following traders will go with the overall direction of the trend, and buy dips in a rising trend and sell rallies in a falling one.

By contrast, range trading allows a trader to do both, since by definition a price is moving between two clear levels and (on that time frame at least) is making no progress either upward or downward.

How to range trade

Firstly, traders need to identify the range to be traded. Usually, a price must recover from a support area at least twice and also move back from a resistance zone at least twice. Otherwise, the price may simply be establishing a higher low and higher high in an uptrend or a lower high and lower low in a downtrend.

The below shows a trading range – as can be seen the price is moving sideways over time between two clearly defined levels of support and resistance:

The straight lines represent the trading range and provide the trader with the support and resistance zones needed to provide entry points and areas for stop losses and limit orders.

Once the range is identified, the trader looks to enter positions that take advantage of the range. They can either enter positions manually, buying at support and selling at resistance, or use limit orders to enter positions in the appropriate direction once the market has reached resistance or support.

Use of stop losses in trading ranges

As with all types of trading, correct risk management is essential. The principle of range trading sees prices hit a zone of support and areas of resistance. Thus prices will not usually exactly respect these areas; trading ranges tend to attract plenty of traders, and thus volatility could increase. Prices can therefore oscillate around these points, and so prudent traders will look to use wider stops around these key points, and a concurrent decrease in position size to remain within the key 2% rule, in order to avoid ‘whipsaw’ movements that stop out traders from positions that might have ended up being successful trades.

It is important to look at the width of the trading range and also the distances to be employed in stop placement – if the range is too tight then the stops at the required distance may not create the necessary risk-reward ratio, which should be at least 2:1 in favour of risk in order to provide an attractive rationale for a trade.

Using indicators when range trading

Trading a range can just utilise support and resistance levels, but it can also involve the use of indicators. Such technical indicators, such as the Relative Strength Index (RSI), stochastics or the Commodity Channel Index (CCI) can be utilised to confirm the overbought and oversold conditions that often accompany price movements at the top and bottom of a trading range.

The graphic below demonstrates the successful use of the CCI in a range trade:

Trading a range breakout

Of course, no trading range lasts forever. Eventually, all trading ranges end, as the price breaks out, either higher or lower. In this case, the trader can either look to find other markets that are trading, or go with the break out of the range and look to take advantage of the new trend.

The trader may want to wait for a retracement in this trend before placing the trade, in order to avoid ‘chasing’ a market. Buy or sell limit orders could be used in this eventuality, with the order placed so as to take advantage of the breakout.

If a trader is looking to trade a breakout, then other indicators can be used to help identify whether the breakout will continue. A significant increase in volume on a breakout, either higher or lower, would tend to suggest that the change in price action will continue.

Of course, there is always the possibility that a breakout will be a ‘false’ one, and that the price moves back into the pre-existing range. As with all things in markets, without the aid of a crystal ball it is impossible to know when a breakout will continue or whether it will revert. This is why stop losses are essential.

Range trading summed up

Range trading is a useful skill to have. As noted at the beginning, most markets do not trend all of the time. Indeed, trends are relatively rare. Range trading allows traders to take advantage of these non-trending markets. It is not possible to know when a range begins or ends, and thus traders should not try to pre-empt a market, but wait until the range has been established.

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