Basic Range Trading

Basic Range Trading With Bollinger Bands by Mark Deaton

Range trading is a basic technique used by novice traders and experts traders alike. The principles behind this technique rely on the price of a security moving back and forth within a certain price range.

When the price hits the ceiling of that range it is likely to rebound and if the price hits the floor of the range it will probably bounce back up. Bollinger bands are excellent for this purpose and many traders use them to range trade because they accurately predict price ranges and they display this information in an easy to decipher manner.

Basic Range Trading

Often range trading is performed by a trader analyzing strong resistance and support lines. These are effectively price barriers which a security will have trouble passing beyond and often the price will hit these barriers and rebound. A trader can take advantage of this situation by placing pending buys or sells at the resistance and support lines.

Once the price hits one of these lines and triggers the pending buy or sell it is likely the price will fail to break the barrier and will move in the opposite direction thus creating profit for the trader. This is the basics behind range trading and if done properly it can be very successful, however the calculation of resistance and support lines can differ from trader to trader and this is what makes range trading with Bollinger bands a different prospect.

By using the standard Bollinger band parameters a trader will notice that the volatility of a security can also represent a range within which the price will often trade. The upper Bollinger band can be viewed as the ceiling price whilst the lower band is seen as the low price.

Often the security will move back and forth between these two bands and this creates a perfect opportunity for range trading. The bands present standard potential high and low prices as opposed to interpretable resistance and support lines and this can lead to greater reliability.

The Bollinger bands also change according to the behavior of the market and with a little bit of knowledge a trader can also grasp when to stop range trading because it may appear that the range is about to be broken.

Once the Bollinger bands have been properly set up, a trader can freely place sells at the upper band and buys at the lower band in the hope that once these are triggered the price will rebound and create a profit. This is one of the most basic techniques associated with Bollinger bands and it can be very successful.

However as with any indicator the┬áBollinger bands┬ácannot be 100% reliable and sometimes a price is known to walk the line. This occurs when a security’s price hits an upper or lower band and keeps on clinging to it instead of rebounding. This can be a massive problem for traders but can be avoided by intelligently placing stop losses on any forays into the market.