How to Determine a Range-Bound Market

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Introduction

The fact is, during trending markets Market traders can trade profitably and comfortably, but once a trend is over all kinds of problems arise: trend-following systems no longer work, frequency of false entry signals increases, as does whipsaw, bringing additional losses which eat up earlier accumulated profits. Taking into consideration that markets spend up to 50% of the time in a non-trending, sideways state, the knowledge of how to deal with range-bound markets becomes vital. So what's the simplest thing we know about range-bound markets? ...Its beginning is difficult to spot. Quite often by the time we realise that the market is ranging we've already made a few errors and paid for it.

There are various strategies that help traders' during range-bound markets, but there are few that point to how to spot range-bound markets at their earliest stage. Knowing so allows traders to re-align their strategies or to get out of the market all together. Below we'll develop ideas to help detect Ranging Markets. These methods aren't going to shield you completely from ever changing market weather, but may help you to anticipate and make “weather forecasts” with additional accuracy. 

Before we look at how to determine a ranging market let's keep in mind that:
  • If the market is not trending, always treat it as a ranging market. 
  • When using indicator signals, if an indicator no longer shows signs of a healthy trend, you may want to treat it as a beginning of a range-bound market until further improvements.
  • There are few systems that can trade really well during both ranging and trending markets, more often it's one or the other. 
  • If your trading system keeps losing during ranging markets either stop trading during range-bound markets, or make an additional system to use during this period.
Using a Moving Average to determine a Range-Bound Market

One of the methods to detect a range-bound market is by looking at the angle of the Moving average. If, for example, our Moving average (MA) is rising fast - the angle of the MA line on the chart will get steeper and steeper. Already at this early stage we can make a conclusion. 
  • If the angle of the Moving average is rising – the trend is getting stronger. 
  • If the angle is dropping – the trend is getting weaker. 
  • If the angle of the moving average is insignificant, close to flat or is flat – we know that the market has entered its sideways mode.
Now let's have a look at the below example utilising the 50 SMA (regardless the time frame) and its angle on the chart. The direction in which the moving average is going is not important. the angle at which it rises or falls is what interests us. First of all, it's a visual guidance – when the Moving average lies horizontally, we know that the trend has paused or non-existent. Some charting packages will show the MA angle as an indicator, i.e MT4, or you may be able to build your own in other packages. In our visual example we can see the trend ending at 7am on Nov 11th and starting again at 7am on the 12th. During this 24 hour period it may have been wise to pause any trend trade.


Using The Moving Average to judge a Ranging Market


Using The MACD Histogram to determine a Range-Bound Market

Another simple way to detect a ranging market is to use MACD histogram. Remember, that when we look back at historical charts, ranging and trending market periods are very obvious, but when we return to trading in live mode, often there are few clues about the time when the market actually starts ranging. How a MACD histogram can help? By simply adding 2 levels – upper and lower horizontal lines above and below 0 on MACD, you’ll mark areas most vulnerable to market consolidations. In the example below we've highlighted the main ranging area between late April and August. Each market will have different parameters, so it's probably good to do a back test on the relevant market to establish their upper and lower histogram parameters


Using The MACD to help judge when a Market in Ranging

To Sum Up

There are other ways to help detect a ranging market involving multi time frame analysis, candlesticks and ATR to name but a few and some chart packages will offer custom built indicators. Above we've explored two of the easiest methods that should hold a trader in good sted. But as ever Technical analysis isn't an exact science and although these ideas can increase the probability of making the correct decisions, many will go against you and large losses can be incurred. Your own judgement needs to be used when developing trading strategies.
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Introduction

The fact is, during trending markets Market traders can trade profitably and comfortably, but once a trend is over all kinds of problems arise: trend-following systems no longer work, frequency of false entry signals increases, as does whipsaw, bringing additional losses which eat up earlier accumulated profits. Taking into consideration that markets spend up to 50% of the time in a non-trending, sideways state, the knowledge of how to deal with range-bound markets becomes vital. So what's the simplest thing we know about range-bound markets? ...Its beginning is difficult to spot. Quite often by the time we realise that the market is ranging we've already made a few errors and paid for it.

There are various strategies that help traders' during range-bound markets, but there are few that point to how to spot range-bound markets at their earliest stage. Knowing so allows traders to re-align their strategies or to get out of the market all together. Below we'll develop ideas to help detect Ranging Markets. These methods aren't going to shield you completely from ever changing market weather, but may help you to anticipate and make “weather forecasts” with additional accuracy. 

Before we look at how to determine a ranging market let's keep in mind that:
  • If the market is not trending, always treat it as a ranging market. 
  • When using indicator signals, if an indicator no longer shows signs of a healthy trend, you may want to treat it as a beginning of a range-bound market until further improvements.
  • There are few systems that can trade really well during both ranging and trending markets, more often it's one or the other. 
  • If your trading system keeps losing during ranging markets either stop trading during range-bound markets, or make an additional system to use during this period.
Using a Moving Average to determine a Range-Bound Market

One of the methods to detect a range-bound market is by looking at the angle of the Moving average. If, for example, our Moving average (MA) is rising fast - the angle of the MA line on the chart will get steeper and steeper. Already at this early stage we can make a conclusion. 
  • If the angle of the Moving average is rising – the trend is getting stronger. 
  • If the angle is dropping – the trend is getting weaker. 
  • If the angle of the moving average is insignificant, close to flat or is flat – we know that the market has entered its sideways mode.
Now let's have a look at the below example utilising the 50 SMA (regardless the time frame) and its angle on the chart. The direction in which the moving average is going is not important. the angle at which it rises or falls is what interests us. First of all, it's a visual guidance – when the Moving average lies horizontally, we know that the trend has paused or non-existent. Some charting packages will show the MA angle as an indicator, i.e MT4, or you may be able to build your own in other packages. In our visual example we can see the trend ending at 7am on Nov 11th and starting again at 7am on the 12th. During this 24 hour period it may have been wise to pause any trend trade.


Using The Moving Average to judge a Ranging Market


Using The MACD Histogram to determine a Range-Bound Market

Another simple way to detect a ranging market is to use MACD histogram. Remember, that when we look back at historical charts, ranging and trending market periods are very obvious, but when we return to trading in live mode, often there are few clues about the time when the market actually starts ranging. How a MACD histogram can help? By simply adding 2 levels – upper and lower horizontal lines above and below 0 on MACD, you’ll mark areas most vulnerable to market consolidations. In the example below we've highlighted the main ranging area between late April and August. Each market will have different parameters, so it's probably good to do a back test on the relevant market to establish their upper and lower histogram parameters


Using The MACD to help judge when a Market in Ranging

To Sum Up

There are other ways to help detect a ranging market involving multi time frame analysis, candlesticks and ATR to name but a few and some chart packages will offer custom built indicators. Above we've explored two of the easiest methods that should hold a trader in good sted. But as ever Technical analysis isn't an exact science and although these ideas can increase the probability of making the correct decisions, many will go against you and large losses can be incurred. Your own judgement needs to be used when developing trading strategies.
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