What Is Range Trading?

While many investors play the long game, others pursue the short-term gains of trading stocks within a short period of time. As in any investment, the goal is to buy low and sell high, but how can investors set appropriate prices with such a rapid turnaround? To answer this question, you’ll need to learn more about range trading, along with some strategies you can consider for short-term trades. You might turn to an investment platform that keeps you informed about the market and where you can gain insight into your financial strategy.

Range Trading Explained

What is range trading? Range trading refers to a strategy an investor can use to buy or sell an asset within a specific price range. Range trading is a short-term trading strategy that usually lasts no more than a few weeks. The goal is to buy the asset when its price is at its lowest, then sell it when its price rises to the top of its range.

Types of Investments for Range Trading

Range trading techniques can be used for any type of investment vehicle, including:

• Stocks
• Bonds
• Closed-end funds
• Exchange-traded funds (ETFs)

Naturally, range trading is most commonly used for stocks and short-term trades, which is why it helps to understand the basics of making a range trade.

What to Look for in a Range Trade?

First, you must identify a range-bound trade. This occurs when an asset’s price fluctuates between two general extremes: support and resistance.

To initiate the trade, place a buy order at a price close to that of the support, the lowest price at which the asset trades. Then, place a sell limit order at a price that corresponds to the resistance, or the upper limit of the asset’s price range.

Range Trading Strategies

Here are some of the most common range trading strategies.

1. Support and Resistance

Support and resistance refer to the low and high prices within a given trading range. In range trading, the goal is to buy an asset near the lowest price (the support) and sell near the highest price (the resistance).

2. Breakouts and Breakdowns

Occasionally, the price of an asset will break out of the range you’d previously identified. For example, a trader might enter a long position if the stock breaks above the resistance level. Conversely, a trader might enter a short position if the price drops below the support level.

If you can predict these events, you can maximize your earnings. However, timing the market is very difficult to do.  

3. Pivot Points

A pivot point is the average of the high and low from the current trading day and the previous day's closing price. If you believe an asset will rise in value, you might consider selling above the pivot point for the next trading day.

4. Volatility Indicators

Volatility indicators reveal how much an asset’s price has changed over time. High volatility indicates many rapid price shifts, which can be risky for short-term trades. To better manage risk, you may want to make sure you execute your trades during periods of relatively low volatility.

5. Volume Indicators

Volume indicators illustrate how many shares are bought or sold over a specific period. When trading volume is high, there is a greater likelihood of moving a given asset, which may make it a better choice for short-term investors.

Example of Trading Range

Imagine that a stock currently trades between $25 and $35 per share. You place a limit order to buy a share for $25. Once the price drops to this level, your order is filled, and you own one share. You can then place a sell limit order equal to the resistance price — in this case, $35. Once the price rises, you’ll sell your share for $35.

Potential Advantages of Range Trading

Range trading offers several distinct advantages, including:

• Traders have more control over entry costs.
• Short-term trades mean fast turnaround.
• Resistance levels offer clear targets for sale price.

For these reasons, range trading may provide a useful method for short-term traders.

Risks and Limitations to Keep in Mind

Despite these advantages, range trading isn’t easy. Before you start making short-term trades, remember the following:

• Buyers won’t always purchase the assets you own.
• Trading fees can add up on multiple small transactions.
• Range trades require careful planning and research.

That said, the risks and challenges of range trading aren’t unique — any investment strategy carries risk. 

Is Range Trading Right for You?

Short-term trading offers potential advantages, but it also demands careful planning and research. An advisory service can help you perform your due diligence to make well-informed trading decisions.

Even if you’d rather grow your investments over the long term, an investment partner can provide guidance to help you reach your financial goals.

Frequently Asked Questions