Example of How to Trade a Trading Range
When the market is in a trading range, traders should be guided by the maxim “Buy low, sell high.” Also, think of your trades as scalps and not swings. Plan to take small profits and do not hold on hoping for a breakout. The rallies to the top usually look like they will become successful breakouts into a bull trend, but 80 percent of them fail, and 80 percent of the strong sell-offs to the bottom of the range fail to break out into a bear trend. Try to keep your potential reward at least as large as your risk so your winning percentage does not have to be 70 percent or higher. Since the market is two-sided, there will often be pullbacks after you enter and before you exit, so do not take a trade if you are unwilling to sit through a pullback. If the market has been going up for five to 10 bars in a trading range, it is usually far better to look only for shorts and to take profits on longs. If it has been going down for a while, look to buy or to take profits on shorts. Rarely enter on stops in the middle of the range, but it is sometimes reasonable to enter on limit orders there.
Among the best trade setups, beginners should focus on entries that use stops so that the market is going in their direction when they enter:
- Buying a high 2 near the bottom of the range. These are often second attempts to reverse the market up from the bottom, like a double bottom.
- Selling a low 2 near the top of the range. These are often second ...