A trading range is basically when a security or a script is stuck in the price range for a time making consistent highs and lows. Range trading can also be defined as a range-bound trading as the price is usually in a range. The consistent highs act as supply while the lows act as demand. A trading range is basically the range in which the price is behaving or moving in a given time period. So now that we’ve understood what a trading range is, let’s try to understand how to trade in a range bound market.
Understanding a Range-Bound Market.
A range-bound market is quite common in the financial space and it often occurs while you’re trading any instrument. It happens in the crypto space, it happens when you trade any market in the world, it happens in forex, and also happens in stocks all the time. Range-bound trading usually occurs when the market is waiting for some news or there is an event ahead that can decide the direction of the market. A Trading range usually occurs with low volume since it’s an indication that the big money or the institutional money is not present to move the price higher or lower than the consistent highs and lows.
Volatility
When the price is usually stuck in a range the volatility of the particular scrip or the instrument increases. Because due to the lack of momentum and flow in the instrument, it tends to stay in a range giving traders less room to trade and making it harder to make money. Most professional traders always suggest avoiding trading in such ranges especially when you’re dealing with instruments like futures and options. The F&O market is highly volatile with an intrinsic time value which means that the lower the momentum the more it loses its value. Hence range bound trading should be mostly avoided.
Supply and Demand
When a stock is stuck in a well-established range it starts to respect its consistent lows also known as demand and its consistent highs also known as supply. Supply and demand are those regions in a trading range that are continuously respected. A lot of traders scalp when it’s a range-bound market in the smaller time frame to take advantage of the volatility.
Summing Up
A range-bound market is an actual market that tests the traders and the investors as it is stuck in a range likely waiting for momentum on the upside or the downside. A market such as this is used to identify opportunities. A break of consistent and recent highs is called a breakout whereas a break of lows is known as a breakdown. Range trading helps traders to place their short and long trades at supply and demand respectively.
Source: https://www.thecoinrepublic.com/2023/04/23/brief-idea-about-range-bound-market-and-range-trading/