Choppy Range-Bound Markets: The Five Most Useful Technical Indicators to Identify Them When the values of assets do not move significantly from one end of a tight range to the other for an extended period, this type of market is known as a range-bound or sideways market.
They do not create new highs, and they cannot break out above the previous high. If they did, it would indicate that a bull market was about to begin.
They don’t fall below the previous level of support, and they don’t generate new lows that are lower than the previous ones. If they did, it indicates that they committed an error of judgment. If the market were to decline by at least 20 percent, we would call it a bear market.
But how can we recognize such range-bound markets and engage in trade in them? Therefore, in today’s column, we will talk about six technical indicators that may be used in choppy and range-bound markets.
What exactly is meant by trading within a range?
A trading approach known as range-bound trading seeks to identify securities trading in price channels, such as stocks, to capitalize on price fluctuations and turn a profit.
After locating significant support and resistance levels and linking them with horizontal trendlines, a trader has the opportunity to purchase a security at the lower trendline support (the bottom of the channel) and then sell it at the higher trendline resistance (the top of the gutter) (top of the track).
The term “trading range” refers to the period during which the price of a security trades between a consistent high and a constant low. Price support and price resistance are often at the top and bottom of a security’s trading range. Price resistance is typically at the top of a security’s trading range.
Traders can profit from trading inside a narrow range by buying and selling at the trendlines that indicate support and resistance. The security will remain within the price channel until it breaks out.
Although a possible breakout or breakdown should always be kept in mind, According to the theory, it is more probable for the price to bounce back from these levels rather than surpass them. This puts the risk-to-reward ratio and the odds in their favor.
Now that we’ve addressed that issue., let’s talk about the technical indicators that assist us in identifying range-bound markets:
5 Technical Indicators That Can Help You Navigate Choppily and Range-Bound Markets
You may determine whether a call is range-bound by using any one of the following five technical indicators:
Average True Range
The Average True Range is often known as a measure of volatility that examines a security’s price activity over a predetermined time.
After subtracting the high from the low of a single price bar, the next step is to compare the resulting value to the price ranges shown in earlier price bars. The ultimate calculation is derived from a smoothed moving average of the absolute fields over N periods. Where N is the technician’s desired time setting, this average was calculated using a moving smoothing method. For example, fourteen days are the ATR setting that is used most frequently (or cycles).
The formula does not suggest the direction in which prices will move; instead, shares whose ATR values are high are more volatile than equities whose ATR readings are low.
Instead, it is a supplementary technical tool that complements trend-following and momentum indicators to achieve the best possible results. Many traders construct their exit strategies by using ATR multiples.
When the ADX is lower than 25, a market is said to be range-bound. On the other hand, an indication that the market is about to enter the trending phase is given if the value of ADX rises over 25 from below.
Bollinger Bands
The Bollinger Band is a robust indicator that gives traders a variety of trading indications to use in their analysis. Most traders use it as a momentum indicator and a volatility channel. Traders also utilize the upper and lower bands as a volatility channel to search for market volatility cues.
Traders pay close attention to the Bollinger Bands squeeze, which occurs when the upper and lower bands converge or come together, typically after a trending period.
A squeeze or contraction of the Bollinger Bands suggests little volatility in the market being measured. In the financial market, periods of low volatility are typically followed by times of high volatility. This pattern provides market participants an excellent chance to profit from the subsequent or expected shift in the market.
When used to range-bound markets, Bollinger Bands perform their best. When the bands are narrow and contradictory, price volatility is minimal, and the price moves in just one direction, which indicates a range-bound market.
When the bands begin to widen, there is a subsequent rise in volatility, which in turn causes prices to start trending.
Donchian Channel
In range-bound markets, such as those represented by Bollinger bands, Donchian channels also function effectively.
Calculations based on moving averages are used to build Donchian Channels, consisting of three lines made by upper and lower bands surrounding a central or median band.
The top band indicates the highest price security has reached over the previous N. The upper bar shows the highest price during a particular period, while the lower band represents the lowest price. This is because that security has reached during the previous N times. The region between the top and lower bands is the Donchian Channel.
When the bands are narrow and contradictory, price volatility is minimal, and the price moves in just one direction, which indicates a range-bound market.
IV Skew
The skew volatility concept in options trading postulates that option contracts for these are options with the same underlying asset but varying strike prices. And the same expiry date will have varied implied volatilities (IV).
Skew analyses the difference in intrinsic value (IV) between at-the-money, in-the-money, and out-of-the-moneyHere are some options to consider. When the ratio of this indicator falls between 1.3, it may be significant. and 0.80, which suggests that market players are uncertain and waiting for confirmation on either side. When the ratio is outside of this range, it shows that the market participants are confident.
Index of the PCR OI
The Put/Call Ratio (PCR) is a well-known derivative indicator that traders utilize to assist them in determining the general attitude of the market (mood). The ratio is computed by applying the volume of options trading or the open interest for a specific period.
If the ratio is more significant than one, this implies that more put options were traded throughout the day. If the balance is different, however, less than one, this suggests that more call options were exchanged.
Estimating the PCR for the whole options market, including individual stocks and indexes is possible.
Range-bound market conditions are indicated whenever the PCR OI falls within 0.95 to 1.05. in either direction.
Using Multiple Indicators
Traders often combine multiple indicators to enhance the accuracy of identifying range-bound markets. For example, using Bollinger Bands alongside the RSI or the MACD can provide a more comprehensive view of the market’s range-bound conditions.
Bottomline
The signs that are shown above will assist you in recognizing a market that is range-bound or moving sideways. Please remember that it is essential to consider the following: regardless of whether you are trading in a trending or range environment, you should Find comfort in knowing that it is. Possible to make a profit in either scenario.
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Where can I learn more about using technical indicators?
Numerous educational resources are available, including books, online courses, and tutorials that provide in-depth knowledge about technical indicators and their application in trading strategies.
How can I confirm that a market is range-bound using these indicators?
Look for consistent signals from multiple indicators. When several indicators suggest limited price movement and lack of strong trends, it increases the likelihood of a range-bound market.
