How to identify a Range Trading Market with 3 easy method

The sideways markets are the nightmare of the trend following strategies but a proper trader knows how to spot them and or stay flat or change the system into a range trading strategy.

The greatest difficulty lies in the ability to know when a market is trending or it’s in a range.

In this article, I will show you 3 methods on How to spot a sideways market.

Read the article until the end.

The Average True Range (ATR)

The Average True Range is the most common indicator to measure the volatility of the prices.

The main formula calculates the range of each candle and it does an average of X periods.

USDJPYH1

The rule to decide which input to use it’s always the same:

Duration of the cycle divided by 2.

When the ATR is decreasing you can assume that the market is moving sideways and use a Range Trading Strategy.

Range trading

In this chart, I’m using the ATR set on the weekly cycle with its cyclical moving average (96 periods) to highlight when the volatility is decreasing.

As you can see from the arrows, when the ATR is below its moving average you can use a range trading strategy because the price is moving sideways. (Green rectangles).

Range Trading with Support & Resistance

If you don't like to use the averages you can spot the range market just drawing support & resistance on your chart.

Range trading 2

When you see at least two support or resistance very close to each other you can assume the market is in a trading range.

Do you want your Support & Resistance ALWAYS ready on your charts? Download now our 2 premium indicator!

The Average Directional Index (ADX)

The Average Directional Index measures the strength of the trend, regardless of its direction.

The most common interpretation of the ADX is:

  • ADX above 20 (or 25 if you want to be more conservative): the market is trending.
  • ADX below 20: the price is within a range.

I personally didn't like this standard method and I changed the interpretation in:

  • ADX above its cyclical moving average: the market is trending.
  • ADX below its cyclical moving average: the price is range trading.

Have a look:

Range Trading 3

The inputs are always the same:

Standard cycle: weekly (192 periods).
ADX: half of the cycle (96 periods).
Moving average: half of the cycle (96 periods).

And YOU?

Do you have a range trading strategy? Let me know in comments!

arrow

2 Comments

Leave A Response

* Denotes Required Field