What is a Ranging Market?
Traders often wonder what is a ranging market — or a range-bound market. This is one of the types of market environments that you may have to deal with on a regular basis. It is best to be as well-versed as possible about the various market conditions that you could face as a trader.
Range-bound markets are quite common during periods in which the market is unable to determine which way it would like to go. This is because the Bears and the Bulls are battling it out amongst one another, trying to sort out who will ultimately come out victorious.
You may hear of a range-bound market referred to as a horizontal, ranging, or sideways market. These terms all mean that the market is stuck in a specific range for which traders need to accommodate. There is no clear signal in the market. Such a market may also be referred to as a choppy market because it lacks a clear direction.
We want to take a look at a couple of indicators that you can potentially use in a ranging market to still profit even as the market is attempting to decide what it wants to do.
Bollinger Bands are extremely useful in a ranging market because they can give an indication of where the top or bottom of the resistance (or support) of the market is at this given point in time.
Bollinger bands will tend to contract when the market is ranging and unable to decide on a direction. Those bands will expand when the market has moved into a trending environment. Thus, if you see contracting Bollinger bands, it is likely that you are dealing with a ranging market.
One way to indicate that you were in a ranging market in the first place is to use your ADX indicator.
If the market is showing an ADX indicator rating of below 25 then the market is said to be ranging.
Above 25 and the market may be trending in one direction or the other.
Thus, you should pay careful attention to see where this indicator is to ensure that you are actually looking at a ranging market before placing a trade.
Just remember it is always possible for a market to move from a ranging market to a trending market with little to no warning, so make sure you use tight stop-loss orders in order to avoid losing a lot of pips. If you do this, you should be all set to take on the market and be highly profitable.
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