How to Trade a Range Bound Market

After the rally, we're in a consolidation. Here's how to trade it.

The rally off of the lows confirmed the market is in an uptrend. As a reminder, we define a trend by a series of higher highs and higher lows.

We’ve seen a series of higher highs and higher lows since the May 20th lows.

S&P 500, 4-hour:

The horizontal red lines will see selling pressure. If you take a short trade here, be careful not to hang on too long. Sell if you’re profitable, because the trend is up.

Drilling down on the price action to the 1-hour level, we see the market is in a consolidation / sideways trend (the blue box):

Trading Range Bound Markets

So, there are 4 ways to basically trade:

• Sell at the top of the range.

• Buy at the bottom of the range.

(these two methods work if it’s a very WIDE range, giving you a good reward/risk ratio)

• Sell if there is a close below the range.

• Buy if there is a close above the range.

(these two methods work best for narrow ranges, like the one we see now)

Which method do I trade?

First let’s ask ourselves, what do we know?

• We know the market is coming off of major lows.

• With the confirmed uptrend, we know this means the bias is to the upside.

• We know the consolidation range is thin, only ~1%

• Trading a sideways market can be tough and a fast way to lose money.

What you decide to do is up to you. But weighing all the facts is necessary in order to most mitigate risk and increase the probability of success.

The facts tell us that the market is in a confirmed uptrend, still largely oversold, and narrowly range bound.

This tells us bears aren’t doing much. Taken together, it means the market is taking a breather before breaking out higher.

One question I like to ask is, where are all the bears? They can’t seem to hold down price.

A breakout to the upside seems inevitable.

If you’re a conservative trader, buy after the market breaks out and retests the high….

Happy Trading 😊