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. Trend

    The trend is the general direction of a market or of the price ...
  2. Trading Channel

    A trading channel is a channel drawn on a security price series ...
  3. Breakout Trader

    A breakout trader is a type of trader who uses technical analysis ...
  4. Horizontal Channel

    Using trendlines to connect variable pivot highs and lows shows ...
  5. Sideways Trend

    A sideways trend is the horizontal price movement that occurs ...
  6. Descending Triangle

    A descending triangle is a bearish chart pattern created by drawing ...
Related Articles
  1. Trading

    Rising Trend Channel Breakouts - Acceleration Or Top?

    These stocks have been within rising trend channels, but recently have broken the trend channel to the upside. Such a breakout usually signals two potential outcomes: an acceleration of the trend ...
  2. Trading

    Stocks at Major Resistance - Breakout or Reverse?

    These are four stocks that both short and longer-term traders will want to keep an eye on.
  3. Trading

    Stocks Rise as Earnings Surpass Expectations

    The major U.S. indexes moved higher this week as companies posted exceptional first-quarter earnings.
  4. Investing

    The Psychology Of Support And Resistance Zones

    Emotion drives the market more than you might realize. Find out how psychology affects support and resistance zones.
  5. Trading

    Strong Stocks with More Bullish Potential

    These stock are trending, and setting up to go even higher. Here's how to trade them.
  6. Trading

    Stocks Gain Ground in Volatile Week

    The major U.S. indexes ended in positive territory after a volatile week of trading (SPY).
  7. Trading

    Four Stocks For Range Traders

    These four stocks are locked in ranges, offering low risk and high reward opportunities if the ranges continue.
RELATED FAQS
  1. How do I effectively create a Range-Bound trading strategy?

    Understand the basics of trading range-bound securities, including how to profit from the relative predictability of the ... Read Answer >>
  2. What are some ways to make a distribution channel more efficient?

    Understand what a distribution channel is and how companies use them to move product. Learn how to make a distribution channel ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What are the best technical indicators to complement a Turtle Channel?

    Learn how two additional technical indicators can be used to complement a trading strategy designed for use with the turtle ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center