Range trading

Active investors can use a variety of strategies depending on their outlook, objectives, risk tolerance, and other specifics. Range trading is one of those strategies. It involves tactically buying and selling a stock over a short period of time. Before you attempt to range trade, you should fully understand its risks and limitations. Make sure you have a plan that identifies your objectives and the constraints of using this strategy within the context of your overall portfolio. Here are some answers to frequently asked questions to help you get started:

What is range trading?

Range trading is an active investing strategy that identifies a range at which the investor buys and sells at over a short period. For example, a stock is trading at $35 and you believe it is going to rise to $40, then trade in a range between $35 and $40 over the next several weeks. You might attempt to range trade it by purchasing the stock at $35, then selling if it rises to $40. You’d repeat this process until you think the stock will no longer trade in this range.

What types of investments can I range trade?

You can apply range trading strategies to most investments, including stocks, bonds, closed-end funds, ETFs, and more.

What are some of the risks and limitations of range trading?

A significant risk of range trading is that it requires precise market timing, which in this case means knowing when and for how long a stock or other investment might trade between 2 prices. Range trading can result in losses if the stock price does not move in the direction you anticipate over your time horizon.

What are some range trading strategies?

Because range trading involves identifying significant price levels, some of the technical analysis strategies used with range trading include support and resistance, volume trends, and moving averages.

How is support and resistance used in range trading?

Support is a price level at which demand may be strong enough to help prevent a stock or other investment from falling any further. The rationale is that as the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell. Resistance is a price level at which supply may be strong enough to help prevent a stock or other investment from moving higher. The rationale is that as the price rises and approaches resistance, sellers (supply) become more inclined to sell and buyers (demand) become less willing to buy. In a range trading strategy, you typically buy at support and sell at resistance.

How is volume used in range trading?

Volume is a critical part of range trading. Analyzing trends in volume can help you validate patterns to determine if the timing might be right to use a range trading strategy. Technical analysts tend to believe that volume precedes price; to confirm any trend, volume should increase in the direction of the trend.

How are moving averages used with a range trading strategy?

Stocks and other investments can vacillate between trending (i.e., going up or going down) or non-trending (i.e., moving sideways). If you fully understand the risks of range trading, you would first want to determine whether the market is trending or not, with a time frame that aligns with your strategy. If there is no trend (that is, the stock or other investment may be trading in a range), a range trading strategy might be executed. However, if the stock or other investment appears to trend in a particular direction, that would likely negate the value of a range trading strategy.

How might a range trade be set up?

If you think you’ve identified a range bound trade, you might consider placing a buy order close to a price level that you’ve identified as a support price. To complete the trade, you would consider placing an order near a price level that you’ve identified as a resistance price level. These support and resistance levels may be a moving average or some other price level that you’ve identified as significant. Given that range trading entails market timing, which is exceedingly difficult, you might consider placing a stop limit order to sell at some percentage below the price that you bought at (assuming you were able to buy the stock at your desired price).

How is range trading affected by market movement?

Markets vacillate between trending, or range expansion periods and non-trending, or range contraction periods. So the first task of the trader is to determine whether the market is in a trend or not in the time frame they’re interested in trading.

Choose the criteria. See stocks that match.

Our Stock Screener matches your ideas with potential investments.

More to explore

Investing involves risk, including risk of loss.

Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. Past performance is no guarantee of future results.

Stop loss orders do not guarantee the execution price you will receive and have additional risks that may be compounded in periods of market volatility. Stop loss orders could be triggered by price swings and could result in an execution well below your trigger price.