We can say that a market is ranging when prices don’t make any higher high and higher low and start trading horizontally between a definable level of support and a definable level of resistance.
Once i see that the market changes its behavior, i have to change my tactics and adopt a trading strategy that fits this new market condition.
To confirm a ranging market, i have to look for at least two touches of support level, and two touches of resistance level, and once i have identified the range, then it becomes very simple to trade it by going long when prices reaches the support level and going short when prices approach the resistance level.
See below an example of a range-bound market:
As you see, as prices approach the key support or resistance level, we have an opportunity to buy or sell the market; we need just to wait for a clear price action setup such as a pin bar candlestick.
Look at the illustration below:
The illustration above shows us three trading opportunities, let me explain you how you can trade them successfully:
1-The first one is a pin bar rejected from the support level, you can place a buy order after the pin bar closes, or you wait for the market to touches the 50% of the pin bar range.
Your stop loss should be placed above the support level, and your profit target must be placed near the resistance level.
The risk reward of this trade is very attractive.
2-The second trading opportunity occurs near the support level, you place a buy order after the close of the pin bar, and your stop loss should be below the support level. your profit target is the next resistance level.
3-The third setup is an obvious buying opportunity; as you can see the market was rejected from the support level and formed a pin bar to inform us that buyers are still there, and the market is likely to bounce from the support level.
Trading from major key support and resistance levels is the easiest way to make money trading range-bounds markets, don’t never try to trade any setup if it is not strongly rejected from these areas.
The second strategy is about trading in the direction of the breakouts of major key levels or waiting for the prices to retrace back to the breakout point and then you go long or you short the market.
See the example below:
The figure above illustrates a range-bound market, the price broke out of the support level and retraces back to the point of the breakout, and the formation of an obvious pin bar indicates a high probability
signal to short the market.
This is how professional traders trade ranging markets based on this price action signal.
How to confirm pin bar signals using technical indicators
Using technical indicators to confirm your entries will increase your probability of the trade being profitable, i’am not telling you that you have to focus on indicators to generate signals, because this will never
work for you, but if you can combine your price action strategies with the right indicators, you will be able to filter your signals and trade the best setups.
One of the best indicators that i use to confirm my entries when I examine a range-bound market is the Bollinger bands indicator.
This technical trading tool was developed by John Bollinger to measure a market’s volatility.
The strategy is very simple, we will combine horizontal support and resistance with the upper and lower Bollinger bands false breakout, if prices are rejected from major key levels and from the bands, this is a confirmation that the market will bounce from these levels.
See an example below:
If you look at the chart above, you will notice how the Bollinger bands act as a dynamic support and resistance, when the market approaches the upper or the lower bands, prices bounce strongly.
So if we see that a pin bar is rejected from a horizontal key level and from bands, this is a clear confirmation to buy or sell the market.
This confirmation strategy is very simple, and it will help you decide whether to take a trade or ignore it, because trading is all about emotions, and sometimes, you will spot a nice pin bar signal in a range bound market, but you will find it difficult to make a decision.
What you have to do in this case is simple, just put your Bollinger bands on your chart, and if you see that the signal is rejected from horizontal levels and from the bands, don’t over thinking about what you should do next.
Just execute your trade, place your stop loss and profit target then stay away and let the market do the work for you.
See another illustration below:
The daily chart above shows us how this indicator could help us execute our trades with confidence; the false breakout of the resistance level that was made by the pin bar was a powerful signal to short the market. The trade was confirmed by the false breakout of the upper band as well.
Remember that this technical indicator is used just as a confirmation tool in range-bound markets, don’t use it to generate signals, use it always in combination with horizontal key levels, and you will see how this strategy will affect positively your trading account.
In conclusion, i recommend you to practice these strategies as much as you can before you open and fund your trading account.