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 trend lines, a trader can buy a security at the lower trend line support (bottom of the channel) and sells them the upper trend line resistance (top of the channel).

BREAKING DOWN 'Range-Bound Trading'

Range-bound trading strategies involve connecting reaction highs and lows with horizontal trend lines to identify areas of support and resistance. The strength, or reliability, of the trend line 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 trend line 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 trend line and selling at the resistance trend line 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 trend lines to mitigate the risk of heavy losses from a high volume breakout or breakdown. For example, if a security has a lower support trend line at $10.00 and an upper resistance trend line 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 trend line.

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 trend lines, with a total of four short trades and two long trades. The stock's breakout from upper trend line resistance marks an end to the range-bound trading.

Chart courtesy of StockCharts.com.

RELATED TERMS
  1. Channel

    A channel may refer to a distribution system for businesses or ...
  2. Price Channel

    A price channel is used in technical analysis to chart the price ...
  3. Trading Channel

    When charting the price of an asset, this is the space on the ...
  4. Ascending Channel

    An ascending channel is the price action contained between upward ...
  5. Envelope Channel

    An Envelope Channel is a series of technical indicators used ...
  6. Channel Check

    A method of independent stock analysis whereby company information ...
Related Articles
  1. Trading

    Channeling: Charting A Path To Success

    Find out how to build these charts showing buy, sell, stop-loss and take-profit points, and even estimate length of trade.
  2. Trading

    Buy These Stocks on The Pullback (LEN, FNF)

    These four stocks are in upward sloping trend channels and have recently pulled back toward the bottom of the channel, providing a buying opportunity.
  3. Trading

    Trend Channel Buying Opportunity in These Stocks (ABBV, RTN)

    These stocks are rising within trend channels and flashing a buy signal with the price near channel support.
  4. Trading

    Trading Opportunity in These Trend Channel Stocks

    These stocks are all moving within trend channels. With prices of these stocks trading near the extremes of those channels, there's an excellent trading opportunity.
  5. Trading

    Rising Trend Channel Buying Opportunities

    These two stocks are in long-term rising price channels. Currently trading near support, an upside move indicates another wave higher.
  6. Trading

    Commodity Stocks With Buy Signals

    These commodity-related stocks are in uptrends and currently near support, providing a buying opportunity.
  7. Investing

    Time to Buy These Stocks at Support

    These stocks are moving within well-established trend channels and have recently pulled back toward channel support, presenting a potential buying opportunity.
  8. 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.
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center