Price Action: Trading Range Methods (Part 1)

A trading range can be tight or broad,
and you need to trade them in different ways.
Looking for early signs of what the market might be doing is important,
therefore, traders must watch for early signs that a trading range may be forming.

Once you think the market is in a trading range,
it is best to buy in the lower third and sell in the upper third.
A good approach is to buy from a reversal near the bottom of the range.
Entering with stop orders is a good way for beginning traders to trade,
and in fact, for those just starting out, it is the best approach.

When the rally looks weak,
it is more like a bull leg within a trading range
rather than the start of a new bull trend.
If price is at the top of a potential trading range,
the win rate for entering at this point is usually poor.

When the trading range is tight,
most traders should not rashly trade.
The market is either in a trend or in a trading range,
and the two alternate.
A trading range will eventually have a successful breakout and become a trend;
a trend will eventually evolve into a trading range.
Watching for early signs of a trend transitioning into a trading range is helpful,
because once a trading range forms,
your trading approach must differ from your prior trend-trading approach.

I always look at what the bars on the left look like,
which tells me how to trade the breakout.
Whether there is the possibility of higher prices in the future
largely depends on the bar structure to the left.

When the breakout is well above the bars on the left,
it is more likely to be the start of a bull trend,
and therefore you can expect higher prices.
Many times, a trading range will be filled with two-leg or three-leg moves,
and sometimes these two-leg moves are not so obvious.

For example, a strong breakout occurs,
especially when it is the second leg up,
but it fails to break above the high of the nearest 10, 20, 30, or 40 bars on the left,
then it is most likely still just a bull leg within a trading range
rather than the start of a bull trend.
If it continues higher, well above these bars,
and several strong bull bars close above the prior bars,
then we can begin to believe this is the start of a bull trend.
But as long as it has not broken a significant prior low or high,
it is still more likely just a bull leg within a trading range.

If you see a strong breakout
that is not above the high of the bars on the left,
it is more likely just a bull leg within a trading range
rather than the start of a trend.

You will see some particularly strong second legs up
that lure traders into thinking the market is entering a trend,
but this is actually a bull trap,
getting bulls to chase at the highs.
The same situation also occurs at the bottom —
for example, a "second-leg trap" appears,
trapping bears into shorting at the lows.
Trading ranges frequently disappoint traders who chase highs and sell lows.

If you see some buy signals that look unimpressive yet produce profits,
or some terrible sell signals that also produce profits,
then you can determine the market is running in a trading range.

In a trading range,
low-probability events are not as low-probability as you might think.
If you find that low-probability moves in both directions produce profits,
this is a clear signal: the market is likely in a trading range.

In a trading range you will also frequently see dojis,
bars that close in the middle with relatively long upper and lower tails.
A single doji is essentially a one-bar trading range.
If you switch to a smaller timeframe,
you will find that the doji is a small trading range.

Therefore, when you see many dojis on the chart,
you are most likely facing a sideways market.
Traders are always looking for whether the market is in a trend or in a trading range.
When I think the market may be entering a trading range,
I look for evidence to support that judgment,
and only when I confirm the market is sideways
do I trade using trading range methods.