Range trading explained
In the last two weeks, following the market’s familiar behavior of climbing one day and sliding another, I recommended, among other things, to “trade the range” as a market strategy.
This strategy is similar to another kind of handling or managing price movements. They are often confused with each other. This is the so-called “trend trading” strategy.
However, the two have distinct properties, “requiring almost diametrically opposed mindsets and money-management techniques.”
Range vs trend
Market prices have two characteristic movements and two equally distinct patterns of direction. First, they either go up or down when they move. Second, when these movements are repeated over a period of time, they turn into distinct patterns that are indicative of the direction of market prices. Thus, market prices are described to be either up or down, going upwards or downwards or heading “north” or “south.”
Actually, there is also a third type of price movement and pattern involved. This occurs when market prices remain the same or fairly at the same level despite the resultant spate of buying and selling activities.
In this case, market prices are described to be “unchanged” in their movement. The pattern and direction created, in turn, are described as moving “sideways.”
When the upward or downward movements of market prices are confined within a certain price ceiling and floor, as in trading within what is called a “price channel,” market prices are said to trading on a “range.”
But when market prices are either heading toward the long established higher highs or lower lows, the market is said to be trading on a “trend.”
In range trading, you try to identify market support and resistance levels. In trend trading, you try to identify breakout or breakdown points.
More distinctions
While trend trading account for the direction of market prices, range trading does not care about direction. It is not as concerned as to where the market or market prices are headed as compared with trend trading.
The underlying principle behind this is that no matter which way the market is headed, or is apparently moving to, “it will most likely return to its point of origin.”
Due to this, range traders are expected to “bet on the possibility that prices will trade through the same levels many times, and the traders’ goal is to harvest those oscillations for profit over and over again.”
This is obviously different from “trend trading” where right entry in the direction of the market or of market prices is necessary. This is because trend trading involves obviously investing on the right direction.
For instance, if you buy just when the market is going down, and going further down, you will have lost your trade. Likewise, when you sell just before the market turns around to head up, heading higher still, you will have lost trade, as well. Thus, entering at the wrong direction will lead to a sure loss. This is not the case in “range trading.”
Because market prices will most likely come back to their original point, range traders can afford to be wrong at their entry point. This mistake is even said to be necessary. It will help traders find out the range of the market or of market prices and serve as their starting point to build a trading position that will, accordingly, yield repeated trading profits.
Bottom-line spin
The market began the week on negative territory and stayed that way almost throughout, save when it closed higher last Friday when it ended up by 23.99 points, or 0.56 percent, from the previous 4,261.59.
On a weekly basis, the market was again down by 40.84 points, or 0.94 percent, from the closing index of 4,302.43 the week before.
To recall, the market hovered over the 4,300 level before last week. As reported, on Monday that week, the market then opened at the previous week’s closing index of 4,312.96, and closed higher at 4,356.87.
The following Tuesday, the market opened slightly lower from Monday’s closing index but went on to trade higher to hit the session’s high of 4,363.73, which also served as the market’s closing index for the day.
In the next two days, the market traded lower. As a sign of the market’s latent and impending fall, the market coincidentally opened lower from the previous days’ closing indices.
In particular, the market opened lower at 4,362.23 on Wednesday compared to the previous day’s closing index of 4,363.73, and closed lower at 4,341.62.
On the following Thursday, the market again opened lower at 4,339.46, hit the high of 4,354.46 and closed slightly higher—but still down compared to the previous day’s closing—at 4,339.66.
On the last trading day Friday, the market opened 16.61 points lower at 4,323.05. It failed to go any higher during the day that it closed at its session’s low of 4,302.43.
In the end of these all, though, the market only incurred a weekly loss of 10.53 points, equivalent to 0.24 percent from the previous week.
Back at the first week of the month, the market notably traded on positive territory. A closer look will reveal as well that the market then was just about where it was in last week’s closing index level.
At the closing index of 4,261.59 last Friday, the market has oscillated within a price channel and may now have “arrived at its original position.” In fact, last Friday’s closing index was already some 10.13 points lower from the closing index of the first week of the month.
In view of this, it is possible that the market is now situated on its lower trading band. If not, it is only a little over the lower extreme of its trading band and should be soon turning to the opposite extreme of its trading range.
Considering my previous observations on the market’s performance for the past three months on factors that had critically affected it then, now and in the foreseeable future, it was my conclusion that the market may no longer trade beyond 4,400 until the end of the year.
Taking into account the amount of money that continues to flow into the market, together with its displayed gamely behavior along with noted foreign investors’ activity where they continue to be net buyers, it is my feeling that the market is trading and will be on a range and not on a trend.
(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.)
