Range Trading

[bronxterp 10]

99.9% of systems and methods that I see posted on trading message boards are trend or breakout related. Does anyone actually attempt to trade a range? Given that markets range most of the time, wouldn't it make sense to try to capitalize on a ranging market?

[brownsfan019 17]

Great observation.

 

Perhaps this is why most of what is sold out there is junk...

 

Food for thought.

 

[brownsfan019 17]

The real question Bronx then is, who is in fact trading during ranges and making money? Since it's not these systems you see on the internet... I wonder...

 

 

I think you have a very strong argument for developing a trading system that makes mega-money during ranges and takes minimal hits during trends since we KNOW that the markets range more than they trend...

 

At least, that's the path I took in my trading career... You see all these wonderful systems and ideas that make money when it's trending, but what you see in real-time is A LOT of up and down, \/\/\/\/\ type moves. So if you KNOW this, why only trade trends or think that the trend is coming that day, at that particular time?

 

The key is to not get run over during a strong trending move. If you can minimize losses during a strong trend and make some nice coin during ranges, I would argue that you would make MUCH more trading this way vs. a break-out / trend trader; at least on the index futures. Cannot comment on individual stocks.

 

My personal trading plan profits largely during range bound movements, but has a hint of trend trading with it. Primary goal is to maximize return in range bound or 'choppy' conditions and secondary goal is to minimize losses during trends or with a little luck, come out ahead (usually not that much).

 

I would like to nominate Bronx's post for post of the year. I don't think TL has a post of the year, but I would like to suggest we have a post of the year contest since the end of this year is soon and then I'd like to nominate Bronx's post for that honor. Why you might ask? B/c this thread has the potential to be the most thought provoking thread on TL. Ever. It could also fall to the waste side as Bronx and I debate the merits of the post.

 

If you are reading this thread thinking it's a waste of time, you are not there in your trading yet to 'get it'. Hopefully you will. Just do not throw this post aside with the many others floating around TL.

[OAC 10]

99.9% of systems and methods that I see posted on trading message boards are trend or breakout related.

 

I wouldn't say it is 99.9%. Not even close. I have seen quite a few techniques covered here that are range-related or so-called mean reversion techniques: (1) Jperl's VWAP and Standard Deviations, (2) Market Profile's fading Previous day's high, low, VAH, VAL, (3) Fibonacci Retracement Clusters , (3) Harmonic Patterns such as Gartley, Butterfly, (4) ABC retracement pattern, (5) Andrew's Pitchfork , (6) MACD, RSI Oscillator Divergence, (7) Double Top and Bottom, Head and Shoulder formations, and lastly (8) Most of the candlestick formations are reversal and not continuation patterns.

[smwinc 20]

Apologies for the long post here--

Trending and Ranges is completely in the eye of the beholder. Timeframe, price range, etc.

 

I don't think it's worthy of a lengthy discussion about it? If we just look at the most commonly traded US E-mini Index Futures; we all know how important the big money is. The 'institutions' as a group - hedge funds, banks, large proprietary houses - without doubt do not trade a 'trend' system, or a 'range' system. They are (broadly) using (not limited to) quant. models, directional-based, event-based, marcro-economic, long/short, stat. arb, etc. From what I've read of this forum, the calibre of the general forum community know this already.

 

I think its too easy to get 'caught up' in the world of "little guy" trading. We all have particular ways of getting into and exiting the market - OEC just mentioned plenty.

 

In my humble view, whatever you trade in whatever way, just understand that. Make it your world - Trade what you see, understand and have experience in. Avoid trying to put things into categories.

 

as an example, an experience that stuck in my mind:

 

I remember working with a bank a while back, with an FX desk. They were predominantly proprietary, but their core function included managing risk / exposure for the bank's currency risk, forward positions, sales trades, etc. As far as size, not uncommon to see the desk execute trades at the 100mln Euros level.

 

Most people have heard of front-running, or have seen it in the markets. I remember the head of the desk explaining, when they had "nothing better to do" they might see a rival bank come in to buy. Not only do they know they bank (they can see the counterparty), they know the guys working in the bank. Similar to seeing Goldman step up to buy in the S&P Pits, but often even more personal. They can usually take a good guess of if it will be a big or small trade. Even if they had a short bias, they will buy up big-time to front run the other bank, before flipping it once the other bank's stopped buying. The other (really amusing) scenario is when the other bank already anticipated this, and never actually wanted to buy in the first place, and reverses short at 10x the size. Anyway..

 

The point is - - these guys could not care LESS whether we just made a higher lower, etc. It's about knowing your market, and who trades it, and how.

 

I think a good general 'rule' to new traders would be: imagine asking your query, or telling your 'market information' to someone like the guys detailed above.

 

In my opinion:

 

Range bound markets, trending markets, etc -- no.

demand and supply, liquidity, "real" price action -- yes.

 

There are endless setups out there, but many of them (or the ones that actually work, anyway) boil down to very very similar, core concepts. So when we try and design a trading style, system or methodology - it needs to start with a) Your market b) apply core concepts to it.

 

 

SMW

[OAC 10]

And also Wolfe Waves;)

[walterw 10]

Bronx : I personally make good range trades using this methods on this threads : http://www.traderslaboratory.com/forums/f34/the-false-break-trade-1994.html http://www.traderslaboratory.com/forums/f34/the-lazy-trade-1942.html

 

they seriously capitalize on the coils that market create permanently...

 

my favorite is the false break... because the market just doesnt have any intention of going outside the boundaries he already created... hope helps.. cheers Walter.

[OAC 10]

 

If you are reading this thread thinking it's a waste of time, you are not there in your trading yet to 'get it'. Hopefully you will.

 

I hear you. We all need a repertoire of various tools to adapt to constantly changing market conditions.

[james_gsx 16]

I would have to agree with Brownsfan, when you are day trading then most of it is range bound in some way. There are various ways to trade this but most people don't even have a clue how to do it. I would agree that you should know who trades your market, when they are trading, and basically figure out what the big institutions.

 

But the fact is most people can't even afford the draw down those major institutions can. Why trade like a bank when you have a $100,000 account? If I ran a large fund I would understand and my trading plan would be different. In fact I would definitely want to use quants for part of my business. But if my style of trading consists of trades lasting less than two minutes then I don't really care about what the major banks are doing. I'm more concerned with "reading the tape" and knowing the path of least resistance. If the banks come in and make a big move, chances are I will see it and go along for the ride. I don't care if it's Brownsfan with his money making the move or Goldman Sachs, if the trade fits my plan then I better be in it regardless. Also most smaller traders don't have the knowledge, time, or capital to do quant trading to an extent any bank or fund does (let alone even understand the math behind it). I'll let them write their quants and I'll stick to my 1ES point trades.

 

Let's look at Friday for example, I would call this a choppy day. We did close up (70 pts I think?) but the simple fact is no one has a trading plan that says buy at the open and sell at the close and actually makes money. If you traded a simple moving average crossover you would have probably 3 good trades and the rest you would have been stopped out. But if you have a plan set up for range bound trading, as you can see in the chart, you would have walked away with a lot more money while the guy trying to find the trend is losing his shirt.

 

So the questions still stick around, how do you trade the range? Do you buy at support? Well how do you know it's even going to hold, and what is a realistic target? What happens if that support or resistance line breaks, do we switch to a trending setup? Even then, how do we know it's a trend and not a false breakout?

 

Sorry smwinc if it seemed like I was discounting what you were saying, I wasn't. I'm just saying for a small trader like myself with a very small time frame I think knowing how to trade rangebound vs trend is very important. When I swing trade, that's completely different.

 

[Trvlwanderer 10]

It's funny that as I became much more involved in active trading from years of investing, my targetted system was to trade ranges occuring over days and weeks in stocks that were consolidating. I felt I could better play "between the sheets" than breakouts. Using mostly fib retracements for the trades, I filtered those with heavy volume and consolidating with stockfetcher. The system was profitable, but risk to reward was hard to determine and many trades ended up lasting 2 to 3 days longer than anticipated which made for some uneasy nights.

 

As I reviewd the 700 plus trades over a few months, one thing became clear. I was calling tops and bottoms and those that brokeout (or down) seriously hampered my gains.

 

So, my sytem has since been refined to trending stocks. I do trade range bound swings intra-day as they present themselves with fib retracements. That remains profitable, but only with very tight mental stops.

 

My $.02

[smwinc 20]

I would have to agree with Brownsfan, when you are day trading then most of it is range bound in some way. There are various ways to trade this but most people don't even have a clue how to do it. I would agree that you should know who trades your market, when they are trading, and basically figure out what the big institutions.

 

But the fact is most people can't even afford the draw down those major institutions can. Why trade like a bank when you have a $100,000 account? If I ran a large fund I would understand and my trading plan would be different. In fact I would definitely want to use quants for part of my business. But if my style of trading consists of trades lasting less than two minutes then I don't really care about what the major banks are doing. I'm more concerned with "reading the tape" and knowing the path of least resistance. If the banks come in and make a big move, chances are I will see it and go along for the ride. I don't care if it's Brownsfan with his money making the move or Goldman Sachs, if the trade fits my plan then I better be in it regardless. Also most smaller traders don't have the knowledge, time, or capital to do quant trading to an extent any bank or fund does (let alone even understand the math behind it). I'll let them write their quants and I'll stick to my 1ES point trades.

 

Let's look at Friday for example, I would call this a choppy day. We did close up (70 pts I think?) but the simple fact is no one has a trading plan that says buy at the open and sell at the close and actually makes money. If you traded a simple moving average crossover you would have probably 3 good trades and the rest you would have been stopped out. But if you have a plan set up for range bound trading, as you can see in the chart, you would have walked away with a lot more money while the guy trying to find the trend is losing his shirt.

 

So the questions still stick around, how do you trade the range? Do you buy at support? Well how do you know it's even going to hold, and what is a realistic target? What happens if that support or resistance line breaks, do we switch to a trending setup? Even then, how do we know it's a trend and not a false breakout?

 

Sorry smwinc if it seemed like I was discounting what you were saying, I wasn't. I'm just saying for a small trader like myself with a very small time frame I think knowing how to trade rangebound vs trend is very important. When I swing trade, that's completely different.

 

 

I apologise, perhaps my point wasn't clear.

 

When you talk about a market range trading, or trending, it doesn't make sense unless we give a little more imformation. I'm not trying to be picky or pull on little details here- it completely depends on your trading timeframe.

 

If you execute typically off a 1 minute timeframe / 5 minute anchor you can be trading the (intraday) trend, while the guy next to you is trading off a 60minute, trading the same market as a box ('range') play.

 

Some people will see the chart you mentioned above as a range bound day.

 

Others may sell the open, cover at lunch and "count" it as a trending day.

 

On their own, 'range' and 'trending' don't give enough information.

 

We all have completely different trading styles, and view things differently. As an example, I'm generally quite short-term in the DAX. This morning I made 142 round-turns in the DAX futures. That's not good or bad, it's just my method, and my way of seeing things.

 

The point I was trying to make about about some of the strategies institutions use, is that (I think) it's important to remember (and apply it when necessary) that the logic and reasoning for why many enter and exit trades, may often work and produce profits, but for 'many' methods, its not a cause and effect.

 

I.e. If your strategy is:

Sell when x line crosses over y line, it might work great, but no ones going to argue the 'crossing of the lines' caused price to move in your direction.

Or

Sell when "supply" (however you measure it) exceeds "demand (again, however you measure it), this is arguably a much more X causes Y relationship. Price really WILL move down if your analysis is true, if supply really does overtake demand.

 

Why do fading range breakouts often make a good trade? Some might say: Because Average Joe puts his stop above/below prior highs/lows, Smart money moves the market enough to hit the stops, get that inflow of liquidity to close out their current positions, and reverse the market.

 

Just because fading a range 'often' works, everyone knows of times when we DON'T want to do that.

 

It's about just remembering the logic behind why your strategy works, and knowing when it doesn't apply.

 

Big institutions aren't anything special - they are just focusing on volume and liquidity, just as many other individuals like you and me are doing.

 

The example I gave about them front running another bank, is exactly what many people do when listening to Pit Audio. You hear Goldman is buying, so naturally you join them, and ride the trade. That information and understanding is an edge - if your strategy is an MA cross-over, it might not know yet that Goldman is standing in the big S&P Pit trying to buy.

 

Often the 'best' trades are when the market does something different. We all have bread and butter trades in whatever method we trade in, but (in my opinion) having the understanding to be dynamic, to notice when the standard things don't apply and adapt, can not only save you getting your head ripped off, but also give you those 'big fish' trades.

 

SMW