What is 'Range-Bound Trading'

Range-bound trading is a trading strategy that seeks to identify and capitalize on stocks trading in price channels. After finding major support and resistance levels and connecting them with horizontal trendlines, a trader can buy a security at the lower trendline support (bottom of the channel) and sell it at the upper trendline resistance (top of the channel).

BREAKING DOWN 'Range-Bound Trading'

Range-bound trading strategies involve connecting reaction highs and lows with horizontal trendlines to identify areas of support and resistance. The strength, or reliability, of the trendline as an area of support or resistance depends on the number of times the price has reacted to it. For example, if the price has moved lower off of the resistance trendline five or four times, it's considered more reliable than if the price only moved off of it two times.

Traders capitalize on range-bound trading by repeatedly buying at the support trendline and selling at the resistance trendline until the security breaks out from a price channel. The idea is that the price is more likely to rebound from these levels than break through them, which puts the risk-to-reward ratio in their favor, although it's important to always watch for a potential breakout or breakdown.

Most traders place stop-loss points just above the upper and lower trendlines to mitigate the risk of heavy losses from a high volume breakout or breakdown. For example, if a security has a lower support trendline at $10.00 and an upper resistance trendline at $15.00, the trader may purchase the stock at $11.00, just after a rebound, with a stop-loss of $9.00. This protects the trader if the stock broke down from the support trendline.

Many traders also use other forms of technical analysis in conjunction with price channels to increase their odds of success. For instance, traders might watch the volume associated with a rebound from a support level to gauge the likelihood of a breakdown or breakout. The relative strength index (RSI) is also a useful indicator of the trend strength at any give point within a price channel.

Range-bound Trading Example

The following chart shows an example of a range-bound trading strategy with arrows in place for potential long and short trades.

Range-Bound Chart Example

In this chart, a trader may have noticed that the stock was starting to form a price channel in late-October and early-November. After the initial peaks were formed, the trader may have started placing long and short trades based on these trendlines, with a total of four short trades and two long trades. The stock's breakout from upper trendline resistance marks an end to the range-bound trading.

Chart courtesy of StockCharts.com.

RELATED TERMS
  1. Trendline

    A trendline is drawn to illustrate the prevailing direction of ...
  2. Trading Channel

    A trading channel is a channel drawn on a security price series ...
  3. Descending Triangle

    A descending triangle is a bearish chart pattern created by drawing ...
  4. Descending Channel

    A descending channel is used in technical analysis to show a ...
  5. Buy Weakness

    Buy weakness is a proactive trading strategy in which a trader ...
  6. Price Channel

    A price channel is used in technical analysis to chart the price ...
Related Articles
  1. Investing

    The Utility Of Trendlines

    Trendlines give an investor a good idea of the direction an investment might move in. Discover how to make them work for your portfolio.
  2. Trading

    These Stocks Poised For Upside After a Pullback

    Amidst an uptrend, these stocks are flashing buy signals following a recent pullback.
  3. Trading

    Stocks Close to Technical Entry Points

    These stocks are trading near trendline support, providing a potential buying opportunity.
  4. Trading

    3 Stocks Channeling Higher and In the Buy Zone

    Trending higher overall, and trading near support following a pullback, these stocks are in the buy zone.
  5. Trading

    4 Stocks to Buy Right Now at Support (CDK, ISBC)

    In uptrends and trading near support, these four stocks are presenting swing trade buying opportunities.
  6. Trading

    3 Charts That Suggest Transport Stocks Are Headed Higher

    Clearly defined trading ranges on the charts of key transportation securities suggest that this could be the sector to watch.
  7. Trading

    Interest Rates Rise and Tech Underperforms This Week

    Weekly technical summary of the major U.S. indexes.
  8. Trading

    Trend Channel Stocks Near the Buy Point (WCN, MWA)

    These stocks are currently trading near the bottom of trend channels but moving higher, presenting a buying opportunity.
  9. Trading

    Support and Resistance Basics

    Support and resistance are used by traders to refer to price levels on charts that prevent the price of an asset from getting pushed in a certain direction.
RELATED FAQS
  1. How can I determine a stock's next resistance level or target price?

    Determining where the price of an asset will stop once it has hit a new high is one of the most difficult tasks for any trader. Read Answer >>
  2. How do I identify a stock that is under consolidation?

    Discover the three major characteristics stocks or securities exhibit when they are trading under a period of price consolidation. Read Answer >>
  3. What are the best technical indicators to complement the Exponential Moving Average ...

    Utilize additional technical indicators to complement and improve a basic trading strategy that relies on exponential moving ... Read Answer >>
  4. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  5. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  6. How do I place a stop-loss order?

    Learn how to place a stop-loss order and how traders use stop orders to either limit potential losses or to protect part ... Read Answer >>
Trading Center