The share market is a place where often there is a lot of uncertainty lurking around. With such unclear trends in the markets, investors are likely to face a range-bound market wherein the prices lie within a certain band of support and resistance. Though difficult to work with, such a market holds opportunities if tackled properly. What is range bound market?
Identifying a Market in a Range.
To trade on a range bound market, first one should detect the range. Prices bounce back and forth between two key levels. Here’s how to detect one:
1. Established Price Boundaries:
The price will move between a lower level (support) and an upper level (resistance), forming predictable movements.
2. Synchronized Collision:
Seek out prices that consistently turn at these boundaries without penetrating them, indicating a behavior confined within a range.
3. Low Volatility Indicators:
Tools such as Bollinger Bands show constricting bands in a range-bound market, indicating low volatility.
Now that we understand what is range bound market, let’s move on to see how it is created.
Market Sentiment: The Creation of Range-Bound Markets
Range-bound markets often occur in indecision. Other exogenous factors such as pending economic reports, changes in interest rates, or announcements from corporations can keep investors sitting on their hands, and therefore result in price sideways movements.
In this phase, neither bulls nor bears dominate. The market consolidates as traders wait for a major event to influence the next move.
Profiting in a Range Bound Market
Without strong trends, it’s essential to rely on tactical strategies. Here’s how to approach trading in these conditions:
1. Buy Low, Sell High
The principle in range trading is buying at support, selling at resistance. For prices to change predictably, one can place orders near support, exit near resistance, and collect easy profits.
2. Range Scalping
For short-term traders, the scalping of the small and frequent price movements within the range would be effective. Scalpers open and close the trades quickly, capturing minor gains multiple times a day.
3. Maintaining Breakout
Breakouts can gull traders in a range bound market. Price may breakout of support or resistance with the intention to retake it. Confirmation is key-play only when a breakout continues to progress in strength.
Trading Tools: Which to Use in a Range Bound Market
Some tools make trading in range-bound markets more reliable:
Relative Strength Index (RSI):
This indicator points out overbought conditions as sell signals and oversold conditions as buy signals.
Bollinger Bands :
Bollinger Bands contract in a range-bound market, and the price bouncing around the bands gives a look at where to locate the trades.
Moving Averages:
Use short-term moving averages to closely follow the direction of a trend in price, thus making decisions for purchases near support and sales near resistance.
Navigating Risks in a Market with Limited Fluctuations
Range-bound markets experience less volatility; however, false breakouts are possible. So, proper risk management of this is essential to avoid any unpredicted loss.
1. Take Tight Stop-Losses
Use stop-losses slightly below support during buy orders and just above resistance when executing sell orders, to protect you against the unexpected breakouts.
2. Small Position Sizes
Given the limited price movement within the range, avoid large positions. Instead, trade smaller volumes and compound profits through multiple successful trades.
3. Diversify
While trading in a trading range can be profitable, it is wise to diversify through different asset classes or sectors when market uncertainty sets in.
Why Some Traders Love Range-Bound Markets
Many traders do well in range-bound markets because the steady movements between supports and resistances make for several iterations of low-risk trades. And because trading ranges are short-term, by definition, they limit the potential decline experienced in a trending market.
Navigating trading challenges in a range-bound market
Trading in a range-bound market has several disadvantages as discussed below.
– Limited Profit Potential:
When prices are bounded by a range, the potential for significant profits is lessened compared to trending markets.
– Patience is essential:
Range-bound markets require patience, as they wait for prices to hit the support or resistance levels. Otherwise, impulsive trades lead to losses. Knowing when an outbreak is coming Ultimately, every range-bound market culminates in a breakout, whether it be upward or downward.
Conclusion
Although range-bound market seems limited to the naked eye, for those knowledgeable about the fundamental forces at work here, they offer plenty of trading opportunities.
Before starting, ensure your trading set-up is ready by going through a Demat account opening and practicing using tools to identify ranges and capitalize on market movements. Disciplined use of risk management might well turn the range bound markets into a profit-generating machine.