5.7 Ranging markets - Going Nowhere but Still Going On

 
Ranging markets are markets that are basically going nowhere. They keep meandering in a zone between areas of support and resistance and the bulls, or the bears, do not have the muscle to force the price out of this zone for extended time period. Like this:
 
Ranging (sideways) price action on a Forex chart. 
 
Even during strong trends price tends to pause like a mountain climber may stop for a rest before resuming the climb. This period is nothing but the ranging phase.
 
Currency crosses, which do not have the US dollar, usually present the best range-bound markets.
 

Trading with Ranging Markets

 
There are two kinds of trading opportunities when the market is running sideways; one is trading inside the range and the second is trading with the breakouts.  
 
Trading with ranging market involves the following steps:
 
  • Identifying the longer-term trend

 

  • Identifying the type of range

 

  • Confirming that the market is ranging

 

  • Tools to trade with ranging markets
 

Identifying the longer-term trend

 
Just like a trending market, a sideways market cannot last for over. The current sideways movement may take place during an uptrend or a downtrend or even during a sideways move. You find the last one funny, right? Let’s see all these cases in the following charts:
 
Sideways market during a downtrend. 
 
The above Forex chart shows a ranging market during a strong downtrend. The price action remained in range for 26 days. The breakout proved to be a fakeout as it did not sustain and price went back inside the sideways channel or the rectangle pattern. Let's see what happened after December 15th in the following chart:
 
Breakout from the ranging (sideways) market during a downtrend. 
 
Now let's take an example of sideways moves during an uptrend:
 
Ranging market during an uptrend on a Forex chart. 
 
As the above charts indicate that when the market falls into a sideways movement during an overall trend, the possibilities of a breakout in the direction of the overall trends are higher.
 
Let's also check out an example of range within a range:
 
sideways moves within a ranging market. 
 

Identifying the type of range

 
Types of sideways moves on Forex charts.
 
 
As the above diagram illustrates, a sideways movement can be in a rectangle pattern and that make it a perfect tradable ranging market. The second best would be a triangle pattern but then many times the market may move sideways without any pattern and it is always better to avoid such markets.
 

Confirming that the market is ranging

 
To confirm that the market is ranging is not a rocket science; what you need is just a pair of eyes - well, in fact you can identify even with one eye while you are winking but looking at that chart of yours. 
 
However, what we suggest that you should wait for at least a couple of highs and lows in the same resistance and support zones respectively. You may also like to check the reading of ADX to see that it is staying below 25.
 

Tools to trade with ranging markets

 
The tools to trade with ranging markets are as follows:
 
  • ADX
  • Resistance and support zones and lines
  • Resistance and support lines
  • Bollinger bands
  • Oscillators
 

Using ADX in Ranging Market

 
The ADX indicator is great at telling us when a market is moving sideways, or ranging. You’ll recall that the ADX reads below 25 whenever the trend is weak - this is the case with all ranging markets. An eye on ADX reading is also important as when ADX starts rising, you may like to get out as a breakout from the ongoing range becomes a possibility. 
 
Look at the following chart:
 
ADX to confirm that market is ranging. 
 

Resistance and support zones and lines in ranging market

 
The resistance and support zones and lines are the best technical tools to trade with the ranging markets. When the price hits the support line, it's the time to buy and when it hits the resistance line it is the time to exit from the long position and to enter a short position. Not a rocket science, right? 
 
Using resistance and support lines in sideways market. 
 

Using Bollinger bands to trade with ranging markets

 
You may like to check the details on Bollinger bands page. However, the following chart is for your ready reference before you move to that page.
 
Trading the ranging markets with Bollinger Bands. 
 
As mentioned, a safer approach to trade with the Bollinger bands in ranging market is to enter for the long and short positions near the lower and upper bands respectively and exit near the middle band.
 

Using Oscillators to trade with Ranging Markets

 
You can also use an oscillator such as the Stochastic and RSI in a sideways or ranging market. The oscillator will highlight zones where the price is in an overbought or oversold condition. These zones are often in sync with the support or resistance lines enclosing the range.
 
Trading ranging markets with stochastic oscillator. 
 
Though sideways markets sound very boring, in fact there are traders that make a living trading these markets. This is because they are very predictable and offer trading opportunities having very good risk-reward ratios.
 
In any case you must have a clear idea of the market environment, and choose your tools or weapons accordingly. A sniper rifle will not do in a situation when you need a pistol, right?

 

 
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  • Trading in a Ranging (Sideways) Market

 

 

 

  • Range or Trend, Volatility can be Your Friend as well as an Enemy

 

        

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