The current market phase can play a big part in the success or failure of a trading strategy. Robust strategies might do better jobs across different types of markets, but there are plenty of excellent systems that perform far better when the market is trending for example. Recognizing what the market is currently doing is going to be pretty important if you’re going to make it in the long run. Here I’ll discuss some basics of how to determine a range-bound market.
Structure
A range-bound market, balanced market or sideways market in terms of the market auction, happens when there is effectively a consensus on value. This means that buyers and sellers are to some degree balanced out over a range of prices. The higher a market goes, the less active buyers become and the more active sellers become and vice versa for when the market is trading prices at the low end of a range.
As the range-playing activity becomes more competitive, you often see activity tightening up and it can trade in a triangle pattern as the range matures.
But in its simplest form, a range is not particularly difficult to spot – the market in question is not moving directionally for very long and keeps retesting previously explored prices both above and below. Broadly speaking it’s moving in a sideways channel and there tends to be a significantly greater amount of candlestick overlapping especially when price is closer to the center of the range. Most of the volume should trade towards the center and the market will tend to spend more time there too.
Timeframe
A range just as any other market phenomenon, can be viewed on various different timeframes. Timeframe is really crucial to whether it has any analytical value to you as a trader. If you look at something too far removed from the market timeframe that you are trading in, it will probably have far less significance to you. Too close and you won’t be following what the higher timeframe players who move the market are doing.
As a day trader, I prefer to keep tabs on a 15min chart and also a daily chart for a bigger picture view.
Breakout or fakeout?
If you’re a range trader, then obviously once you have a good idea that a market is trading in a sideways range, then you trade your strategy. But for many, range trading isn’t their market condition of choice and they prefer to see directional movement.
If you fall into the second category, you shouldn’t be twiddling your thumbs or getting frustrated by the market’s inaction. In fact, when the breakout from the range does happen, it could provide you with a fantastic opportunity if you read it well. The energy that builds up in a sideways market can create large directional moves when it finally does break.
However, it’s important to assess whether the market is breaking the range or simply extending the range.
An extension tends to happen earlier on in the range development relative to the timeframe and does not hold the new prices for very long.
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The key is to understand how a breakout tends to happen is that it’s all about a change in behavior and not in price – although price is the key point of reference.
This can happen in different ways such as trading activity increasing at one end of the range or activity can surge in one direction from the center of the range. The latter can often be seen in the build to and right after a highly anticipated piece of economic news (e.g. the FOMC).
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How To Determine A Range-Bound Market
Determining whether a market is currently range-bound or not is not particularly difficult. However, a major factor in risk and opportunity is when this is about to change. Understanding the core principles of how and why a market is range-bound can help you to recognize when trading activity is changing and the range might be about to break.
Trade well.