Trading Range Definition & Trading Strategies

What is a Trading Range?

A trading range is when a security trades within a given high and low period for a given period of time.  This back and forth price movement between extremes generates a trading range. 

How are Trading Ranges Formed?

Trading ranges are formed when neither bulls nor bears are in control.  There is no way to know that a security will enter a trading range until it has already begun.  These trading ranges often develop during a strong trend as a sign of accumulation or distribution.  In a strong trend a trading range signifies accumulation.  Conversely, in a strong down trend, a trading range signifies distribution.  This formation is also commonly known as a flag chart pattern.  

How to Actively Trade Ranges

Sell the High & Buy the Low

Trading ranges can prove very profitable.  While they lack the punching power of swinging for the fences, they have a high accuracy rate when traded properly.  A basic system is to put sell orders slightly above the resistance level and buy orders below support.  A trader can play these ranges until the security significantly breaks through a level with volume. 

Trading Oscillators

Oscillators are one of the most popular technical analysis trading tools.  However, these indicators can produce significant losses when the market is trending hard in one direction.  This is because an oversold market has the room to go much lower.  But oscillators statistically work the best in trading ranges, this is because the security lacks the "juice" to push through significant levels.  So, when the oscillator is oversold and the stock is hitting the bottom of the range, a buy order is probably a safe bet.

Chart Example of a Trading Range

Microsoft has one of the most popular trading ranges in the stock market.  The stock has been in a trading range since the 2002 bottom.  Microsoft has consistently traded between a low of $22 and a high of $30.  This trading range had a false breakout in 2007, but the credit crisis of 2008 brought it back to earth.  In this example a trader could have traded Microsoft for years by simply placing a buy order at $22 and then put a sell order slightly above $30.  This trading strategy would have outperformed any Microsoft buy and hold strategy over the last 6 years.