Range trading is a trading technique whereby traders target stocks which are underbought or oversold (also known as support and resistance areas). The trader will buy at the oversold area and sell stocks when they reach an overbought area.
Support and resistance are measures of demand and supply. Support levels are where demand appears to be strong enough to stabilise the price of the asset and stop it from dropping, while resistance levels are prices where selling is thought to be strong enough to prevent prices from increasing.
Range trading is one of the less complicated day trading strategies to learn and can be particularly effective in volatile markets where there is no obvious long term trading pattern. However, ranges are typically narrow with this trading strategy, which can limit the potential for substantial profits.
Stocks are usually on an upwards or downwards trend or fairly static within a specific price range where they may fluctuate ever so slightly. However, the stocks that are confined within a specific range will never trade higher than the upper limit, or lower than the minimum price within the range; they are said to be stuck.
The opportunity arises when trading ranges experience a breakout or breakdown. This is when a stock begins to trade above or below the fixed prices in the range.
Traders must watch attentively and identify stocks that look likely to break out of a long-term trading range and gain momentum. However spotting when a stock is about to enter or exit a trading range can be almost impossible, so it’s best practice to brush up on your trend trading knowledge, as this will provide a good foundation for range trading.