One of the most difficult markets to predict can be the sideways and ranging markets, I always recommend traders to focus on trading trending markets, but the problem is that the markets spend more than 70 % of their time in ranging motion.
If you focus just on trending markets, you will probably leave lot of money on the table, this is the reason why learning how to approach range bound market is a must if you want to make decent living trading financial markets.
What is a range-bound market?
When the market stop making higher highs and higher lows in case of an uptrend or lower highs and lower lows in case of a downtrend, the price starts acting between specific high price and low price.
This is a clear signal that the market is ranging and no longer trending.
See the illustration below:
As you see in the example above, the market is trendless, it is trading between horizontal support and resistance, and you can’t apply the same techniques that you use in trending market to trade engulfing bar patterns in range bound markets.
Let me give you an example, when you are driving your car, you don’t always drive the same way, if you are driving downtown, you try to drive slowly, because you know that driving fast can put your life or other’s life in danger.
But when you are driving in a highway, you’re driving style changes completely, because you know that you can drive fast. So, you always try to adapt your driving style to the appropriate situation.
You have to do the same thing when you are trading the engulfing bar pattern, because all price action strategies we discussed before will not work in range bound markets, and you have to use the right techniques that fit these market conditions.
Before talking about the right way to trade trendless markets, you have to be selective about trading range bound markets to protect your trading account, because not all sideways markets are worth trading. You have to know how to differentiate between sideways and choppy markets.
See the illustration below about choppy markets:
As it is illustrated above, the market trades in a crazy way, we can’t identify major support levels and resistance. You have to stay away from these types of markets, otherwise, you will definitively damage your trading account.
Trading the engulfing bar candle in range bound market is very simple, the first strategy is going to be about trading this price action pattern from major support and resistance levels like we see below:
The second strategy is to trade the breakout of the range or to wait for the pullback. See the illustration below :
The third strategy is to trade the false breakout of the major support or resistance level.
False breakouts are one of the most powerful price action strategies, it occurs in all types of markets, and if you know how to use it in combination with the engulfing bar pattern in a major support level or resistance, you will make money in the market, because you will buy intelligently the bottoms and sell the tops.
See the illustration below: