Range Bound Trading is a technical analysis that predicts the short term highs and lows of a stock. It helps traders and investors to plan when to buy or sell the stock. Range Bound Trading closely monitors the stock range as any change can affect the price.
Range Bound Trading finds the major support and resistance levels with technical analysis. Then, a trend trader can buy the stocks at the lower level of support or bottom of the channel and sell at the upper level of resistance or top of the channel. It is important that the stocks are trading in channels. A trader can buy at support level and sell at resistance level repeatedly until the stock breaks out of the channel.
The upper boundary of the channel is shown by a trendline that connects the points of a stock’s highs for the period. The lower boundary is the trendline that connects the points for a stock’s lows for the period.
Using 34 EMA and 5 EMA
Using a charting platform, plot two moving averages 34 EMA and 5 EMA on any time frame. As the stock is trending, spot the instance that the candlestock intercepts both moving averages. This is an indicator that a range-bound market is forming. Then, create a channel by placing a horizontal line to the closest swing high and low before the specific candlestick. Remember, the swing should be outside the reference candlestick’s body and shadows. Look at the example below.
Now that you’ve predicted to channel of the price, you can execute range bound trading as long as the price stays within the channel.
Although predicting range bound activity is not easy, we illustrated one of the simplest ways to predict range bound movement above. Once a trader spots a range bound market, there are a number of strategies you can execute during the price movement within the channel. It is important to trade range bound movements in the earliest stages because the price might breakout of the channel suddenly and the trader will incur a loss.
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