Range trading is a non-directional strategy which is based on the underlying assumption that 80% of the time, price action does not trend, but rather channels. Range trading offers several advantages including simplicity, and defined risk reward parameters. By focusing strictly on price movements and congestion points on the chart, range trading allows traders to ignore news-flow and simply concentrate on well defined areas of support and resistance.
During moments of limited market volatility, an ideal opportunity presents itself to profit from the zigzag motions in the market. A range bound market is characterized by levels of higher buying pressure, known as a support, and higher selling pressure, known as a resistance. These levels create a channel, where market movement is generally concentrated within these key levels. As major support and resistance levels are defined, range traders apply the unique concept of buying at support and selling at resistance.
Range traders are a bit different from trend traders. In range trading, you’re not so concerned about the trend. Instead, what you hope is that the market swings around a lot and then reverts to its original starting position. This is sometimes called “rangebound trading”. The underlying assumption in range trading is that, regardless of the initial direction of the trend, the market will end up coming back to the beginning eventually.
The underlying assumption of range trading is that no matter which way the currency travels, it will most likely return back to its point of origin. In fact, range traders 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. Clearly range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position.
When managed correctly, range trading and trading range breakouts in the forex market can prove quite profitable strategies for some people. Nevertheless, remember that a certain level of expertise with respect to technical analysis techniques helps determine the optimum levels for trading. In addition, a considered amount of discipline must be exercised in order for the range trading system to work successfully over time.