Technical indicators can help a trader profitably navigate through a period of range-bound trading, or a period in which a stock oscillates between an upper resistance level and a lower support level.
Before a trader can profit from range trading, they must recognize the fact that a genuine trend is lacking and that price is likely to continue moving back and forth within a sideways channel. A good indicator of the existence (or lack of) a trend is the average directional index (ADX). ADX readings above 25 are considered to indicate the existence of a solid trend. Readings lingering below 25 can indicate a trendless market that may remain range-bound for some period of time.
Once a trader has correctly identified a market as range-bound, the most likely profitable trading strategy will trade price movement from the identified top of the range to the bottom of the range. Helpful indicators for pinpointing the top and bottom of a range, while allowing for slight variations and changes in volatility, include Bollinger Bands, STARC bands and the commodity channel index (CCI) These indicators paint a clear picture of the existing trading range and can also, by expansion or by a change in slope from flat to angling up or down, indicate when the market begins to break out of a range.
Bullish or bearish reversal candlestick patterns occurring near the top or bottom of the trading range can provide additional possible trading signals for range trading. Finally, momentum indicators such as the moving average convergence divergence (MACD) can be watched for divergence from price occurring at the extremes of the range as signals that the market may be turning in the opposite direction.
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