Range bound markets are pretty common in the markets. Trading in a range-bound or ‘choppy’ market is a bit of a task in itself and many times, it so might happen that you can book an unforeseen loss, rather than an expected profit. This is because of the missing ‘trend’ which essentially tells the trader in which direction the price action might move.
Range bound markets or choppy markets are bound to happen most of the time. This is the period when the stock is consolidating just before breaking out or breaking down. Though trading in these ranges is pretty tough, many expert traders do scalping or even initiate trades based on the support and resistance levels. Below are 4 such techniques that you can use while trading in a choppy market.
Bollinger Bands is an indicator rather than a technique. Trading in a choppy market using Bollinger Bands can be quite profitable for a trader.
The idea is simple. If as a trader you’re thinking of going long then buy when the price action candle touches the lower band of the Bollinger Band (default setting). And then sell when the price action touches the upper Bollinger band.
Similar is the case with short selling. A trader can short the stock when the price action touches the upper band and buy it when the stock reaches the below band.
Support and Resistance
Support and resistance are another set of key ‘indicators’ that can tell you when to initiate a trade. Many traders trade based on understanding where the support and the resistance stands (even in the trending markets).
As shown in the example above, one can take up a long position as the stock moves up forming a long green candle. The stock, then, can be sold when it hits its resistance level.
Marking support and resistance level is not only important in sideways or choppy market, but it is also helpful when taking up a trade in the trending market.
Why and how? Let’s take a look at the third strategy.
Short term breakouts or breakdowns
You may be familiar with breakdowns and breakouts. If not, then a breakout simply means that the price action breaches or breaks out (moving upwards) of the resistance. In the same way when the price action breaches or breaks down (moves further below) the support area, then it is considered to be a breakdown.
To sum this strategy up in simple words, if trading in a choppy market, a trader can switch to a smaller time frame so that more candles are visible to analyse. Once there are enough candles to draw and decide patterns on, a trader can then look for possible mini breakouts to book some quick profits like in the image above.
Actual Breakouts and Breakdowns
The difference between actual breakouts and breakdowns and short term breakouts/breakdowns is that when an actual breakdown/breakout happens in a sideways market, then it considered that the market has changed into a trending market. While at the same time, short term breakouts/breakdowns may or may not mean an actual trend reversal.
What this means is that lets say the price action is continuosuly testing the resistance level for 3 or 4 times. What essentially happens is that all of the sell orders or sellers fulfill their orders whenever the price action tests the resistance level. At some point of time, there would be not enough sellers to maintain that resistance level, and hence the bulls, move the price action beyond the resistance level. This takes the price of that stock further upwards, till the level where the stock faces another resistance.
The same theory applies to a breakdown as well. And hence as a trader if you witness a breakout at a well formed resistance level in a sideways market, then you can go long. Otherwise, you can short sell the stock.
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