- Elias Zeekeh, MBA, CPA, CMA
Range Bound Trading: Definition and Overview
You will often hear traders use the term trading range, when referring to either an entry or exit point of when to buy or sell a stock. What they mean by the trading range is the high and low price over a certain time period. The bottom end of the range is a support price, and when traders would want to purchase securities. The upper end of the range is a resistance level and where traders would want to sell securities. A strategy that follows this technique of trading is called range bound trading. Below is an example of a trading range from Investopedia:
In order to confirm support and resistance levels traders will usually use some other indicators such as the Relative Strength Index (RSI). The RSI is a momentum indicator between 1 and 100 that is used to indicate if a stock is overbought or oversold. If the measure is above 70 it is considered overbought and if the measure is below 30 it is considered oversold. Another popular momentum indicator is the Stochastic Oscillator for which a reading above 80 is considered overbought and below 20 is considered oversold. Generally, difference in use between the two measures is that the RSI is usually used for trending markets while the Stochastic Oscillator is used to analyze sideways markets.
Off course, there can always be breakouts and breakdowns from a trading range, and to mitigate losses a stop loss order could be placed just below the support level.
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