How to Use Range Trading in Day Trading


How to Use Range Trading in Day Trading. A range is a stock's lowest and highest price for a trading period. This period can be a day, a month or a year. A stock that trades within a range is said to be in a channel. Range traders buy stock at the lower end of the channel and sell at the high end, hopefully before the stock breaks out of the channel and moves in a direction unfavorable to the trader.

Determine whether or not range trading is the best strategy for you. As a day trader, you must close out your position at the end of the market day. A stock may not be in the favorable end of the channel when you are forced to sell.

Consider trading currencies (FX). Range traders often buy and sell one stock many times over. Commissions can take a big bite out of your profits when you are trading in the stock and futures markets. However, most FX dealers don't charge commissions.

Acquire direct-access software. This trading software allows day traders to trade directly with stock exchanges like NASDAQ and NYSE. When you are using range trading, it is important to be able to execute your trades instantly.

Put tight stops into your day-trading program. A stop order is an order to buy or sell shares of stock when the price reaches an indicated amount. Doing so will limit any losses you might incur.

Trade currencies in minilots of 10,000 units, rather than 100,000 lots, especially when you are using leverage. Currency value can fluctuate greatly during the trading day, and trading smaller means you won't risk losing as much money.

Tips & Warnings

  • Range trading generates far more losing trades than winning trades. Don't risk too much of your capital on any one trade.
  • When you are range trading, don't be tempted to buy or sell a stock when a company has issued its annual earnings report and the stock temporarily goes through a volatile period. The stock may not be trading in its true range. Look at other indicators and wait for the stock to settle down.
  • Using range trading when you are day trading can be very risky. Day traders are usually allowed very big margins (sometimes 25 percent of the stock's value). Range traders execute many trades. If you get caught up in buying too many shares of stock, you may have to exit your position very quickly to prevent losing not only your original investment but also a great deal of borrowed money.

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