Overview of trading ranges
This lesson will cover the following
- Trading ranges suggest a struggle for dominance
- Trading ranges are more often continuation patterns
Fighting for dominance
In case a chart is comprised by swings up and down, this means that neither of the two sides is able to overpower the other, thus, control over market movement is alternate. Such a situation is best described as a trading range.
If the sideways movement encompasses about ten to twenty bars, this is indicative of a tight balance between the bulls and the bears. If a trader attempts to trade any brief movement to the upside as a breakout, it will be a costly decision, because sellers usually go short massively on such moves and new buyers look to exit their positions rapidly. This explains the large upper wick of bars.
The same is valid for any brief movement to the downside. Buyers usually go long massively on these moves and new sellers look to close their positions. This explains the large lower wick of bars.
Trading ranges are more often continuation patterns
All trading ranges are considered as continuation patterns, or they more often than not produce breakouts in the direction of the trend, which developed before them. Another specific moment worth noting is that ranges tend to break out away from the exponential moving average. If they form below the EMA, it is possible that they will be breached to the downside. If ranges form above the EMA, they will probably be breached to the upside. This is especially valid for cases, when trading ranges appear in proximity to the moving average. When they form at a distance from it, there is a chance that prices may test the area of the EMA.
If a swing to the upside halts for a while within a trading range, there is a very good chance that the final breakout will occur to the upside. However, it is worthy to note that at times this final breakout may be preceded by several failed ones from the upper and the lower area of the range. It is also possible that the price may break out in a direction against the trend.
If a trading range prolongs too much, it is reasonable to expect that it may lead to a reversal. All these situations add to overall uncertainty and urge traders to use caution when making decisions. This includes examining higher time frame charts, because trading ranges lasting for several hours and having huge difficult-to-read swings on a 5-minute chart appear as small easy-to-read ranges on 30-minute or 1-hour charts.