How to Profit from Range Bound Markets

Today, I am going to teach you one of my favorite strategies for sideways markets.

If you have been trading for any length of time, you have probably noticed that the markets are moving sideways A LOT. Consolidation is a huge part of the market’s balance and so it makes sense to learn strategies that take advantage of the sideways/consolidating type of market conditions.

In this article, you’ll learn a time-tested, accurate strategy for trading these types of market conditions.

As I have mentioned before, I really like strategies that are simple and straight-forward and this one is no different. As you’ll see, I use two basic indicators and a few rules to find trades and there are only a few steps to implementing the strategy.

Step 1

Identify range-bound markets on daily charts

The first step is to identify markets which are in a clear range between a defined support and resistance zones.

Here’s an example of a ranging market:

rb 1

Here’s another example:rb2

This is an obvious ranging market: We have clear topping action and a clear bottom and we have moving averages that are virtually flat.

Once you find a ranging market, you can move on to the next step.

Step 2: Find an Over-Extended Condition

 As always, I like to use multiple time frames to get a complete, accurate view of the market, so once we have a ranging 4 hour or Daily market condition, we’ll zoom into a 60 minute chart to find an over-extended point within the market.

On the 60 minute chart, we’ll add a Bollinger Band (standard settings) and RSI (standard).

rb3

The Bollinger Bands and RSI give us a double confirmation to find over-extended conditions.

We wait for the price to pierce the upper Bollinger band and simultaneously, we want RSI levels to be above 65 levels. If both the conditions are satisfied, we are in position to look for our entry.

We’ll zoom into the 15 Minute chart to find a more precise entry point.

Step 3: Enter the Trade

 To find a high probability entry, we look for a unique combination I have used for a long time.

The combination is a 15 Minute Reversal Candlestick (pin bar, inside bar, engulfing, etc.) at a whole number.  Whole numbers are important because of their psychological value. A maximum number of orders are placed closer to the 50 or 100 levels, for example, at the 1.3050 or 1.3100 levels in the chart below.

Many times, price pushes slightly above the whole numbers and then quickly reverses, sucking in amateur longs, who get trapped and are forced to cover, thereby aggravating the fall.

On other occasions, the institutional orders push price right at the whole number or even a few pips before.

We find an example of both the above methods in the chart below.

rb4

At point 1 (marked on the chart above), the strong hands pushed above the whole number of 1.3050, trapping eager bulls. The expert traders quickly reversed their position taking the pair down, thereby, forcing the bulls to liquidate their position, which led to a sharp fall towards our profit objective.

At point 2b (marked on the chart above), we see price get rejected slightly before the whole number. So, when looking for the entry here is the rule:

As long as the rejection patterns happens within 3 pips of a whole number, we can go ahead and enter the trade to the opposite direction.

rb5

 Step 4: Entry and stop loss positioning

Once the entry is taken, we can set up our trade management.

For this particular strategy, our Stop Loss and Take Profit are very easy.

Once the entry is made, we can place the Stop Loss a few pips above the entry candle or previous candle (whichever has a higher high) and we can place our Take Profit at the mid-band of the Bollinger Bands.

And there you have it. A simple strategy for ranging markets with a very high percentage entry strategy and an easy trade to manage.

Summary Points to Remember: 

  1. Look for a range-bound market on the daily charts.
  2. Once you have chosen your currency pair, select the 60-minute time frame and overlay, Bollinger bands and RSI on the chart. This is where our primary signal will be generated.
  3. Wait till the price pierces the upper Bollinger band and RSI is above the level of 65 and closer to 70. Such an occurrence indicates that the currency pair is getting into overbought territory.
  4. Being in the overbought zone is no guarantee that the pair will reverse so we zoom into the 15 Minute chart to find our entry.
  5. On the 15-minute chart, we want two important conditions to be fulfilled.
  6. We want a reversal bar
  7. We want to enter the trade close to a whole number
  8. The profit objective is at the mid-point of the Bollinger band, where we take our profits.

Though at the first read, it might sound difficult to locate the pattern as you have to watch three different time frames, but in reality, it is very easy. Once you identify a range-bound market on the daily charts, you don’t have to look at the daily chart again during the trading day.

That leaves us with only two time frames, the 60-minute and the 15-minute to watch.  Here too, you only have to watch only one time frame at a time.

Initially, watch the 60-minute charts to identify the signal bar. Once you get your signal bar, drop down to the 15-minute chart to locate the reversal bar and the whole number. Post the entry, you shift back to the 60-minute bar and close your positions at the mid-point of the Bollinger band, in case your stops are not hit.

Hence, all through the trade, you watch only one chart at a time, which is easy. While waiting for a trend to start, you can keep nibbling in a range-bound market, earning handsome profits with this low-risk trade setup.

I hope you enjoyed this article and look forward to sending you more ideas, strategies and trading tips in the future.

-J

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