Home, home on the range…
Not talking about deer or buffalo here, but I bet you have that melody stuck in your head now, right? Don’t hate me!
Today, I’m talking about a specific kind of price action you’re probably familiar with… the range pattern.
Don’t ever say the market is “stuck in a range,” because you aren’t going to be stuck at all. The range pattern is a great place for trading. When you trade a tend you might get a good point of entry for a piece of the action.
But, when you trade a range, you can buy and sell the same exact prices over and over again.
Ranges give and give and give good trade opportunities.
“Range” is another one of those words that is so common, there are a multitude of ways to define them and just as many ways to trade them.
The word “range” is not just a trading term, but it pops up in reference to other subjects such as time, space, objects, geography, science, mathematics, music, golf and technology, to name a few. That makes sense because price action has a lot in common with all of those things.
On your price charts, the range pattern is happening when there is no progress in one direction. The space between the high and the low is called the range. At first that sounds boring, like a sideways market, but nothing could be farther from the truth. The most exciting price pattern for planning trades is the range pattern.
Ranges contain elements of certainty which are rare in a speculative industry.
With previously established highs and lows, you can anticipate where the market is likely to hold, change direction or stop all together. Ranges are less tricky than trends because you can clearly identify targets price is aiming for, and anticipate what comes next.
Here are 5 interesting facts about range patterns when charting price action.
- The range pattern is good for traders who are terrible at cutting their losses. The nature of a range is to not make progress in one direction, so this is the best pattern to trade if you don’t like taking your stops. If the market moves against your open trade during a range, your patience may be rewarded, because chances are price will swing back in your direction.
- Ranges contain areas where you can expect momentum. That sounds like a contradiction, right? It’s not. You can expect the typical slow market condition in a range, but only in the middle third of the range space. Count on momentum showing up when it runs to and from the outer edges of the range.
- Past performance predicts future movement. You’ve heard it – you’ve probably even said it – “Past performance is no guarantee of future results.” However, when it comes to range patterns in price action, I keep track of where price has been in the past 15 bars. Do the math because that’s exactly how far you can expect price to move in the opposite direction in the next 15 bars.
- After a trend, it only takes 7 bars of time in the range pattern to tell me which direction is coming next. Add the 50 simple moving average to your chart. If price crosses that line and stays below it for more than 7 bars, it’s probably not going to return to the trend any time soon.
- The best range trades happen when your expected high or low is suddenly obliterated. Huh? It’s true, and this is my secret weapon in trading. If price breaks out of a well-established range pattern, immediately place pending orders to trade in the opposite direction. If price fails the breakout (which it usually does), it comes barreling back through the range pattern, and those trades move into profit very quickly.