WHAT IS A TRADING RANGE? HOW TO IDENTIFY AND TRADE RANGES?
When a price goes between two parallel trend lines, it is said to go in a channel. The consolidation channel is a sideways movement in which the price is in the trading range. Trading range or consolidation is a fairly common structure in financial markets, so in this article we will look at:
- what a range is
- why the range happens
- some examples of ranges
- and most importantly, we will tell you how to trade a range
What is a range?
Consolidation or trading range in trading is when the price of an asset moves only in the sideways direction, without any significant increase in the upward or downward direction. During consolidation, price movements are limited to certain levels.
You may also have heard of three stages of the market: ascending, descending and sideways. If everything is clear with the ascending and descending, then the sideways stage is actually consolidation or as it is also called the trading range.
We can tell a lot about what a range is, but it is best to show it with a real example. In the chart below you can see a clearly marked range with parallel blue lines.
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Why does a range happen?
Typically, the range period is the time when the market gains strength to continue the trend, as well as periods of accumulation and distribution.
When the market is in an upward or downward trend, the price cannot rise or fall all the time, consolidation or correction is an integral part of the market, which helps to gain strength to continue the price movement.
Periods of accumulation or distribution are periods when the market moves into a new trend. This is a time when institutional traders are busy building positions in the opposite direction, and when they have gained the required number of positions, they push the price in the desired direction, which leads to a breakthrough in the trading range and the market enters a new stage.
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Range trading systems
Let's look at each trading system with examples.
In the chart above we will look at the system - trading from levels, first we need to find confirmation that the price is in the trading range. If you have read our article about levels, then you know that it is necessary to have at least two points to confirm the level. Confirmation of two parallel levels is required to confirm that the price is in the trading range. Once a trader has found confirmation of a trading range, he can open positions to buy, from the lower level, and to sell from the upper level, exposing the stop loss on the level, and setting take profit in parts to another level limit.
Another very popular trading system is the range breakout.
Everything is simple here, after there is a price breakout of the trading range, the trader opens a position to buy. As a result, in this case, the price soared by 260% after the breakout of the upper level. The longer the price is in the trading range, the stronger the movement after its breakout.
And the last system, a false breakout - this is when the price breaks through the trading level, and then changes direction sharply. During a breakout, many traders open breakout trades. These traders fall into the trap at the moment when the price changes its movement, which triggers stop losses.
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