Trading ranges versus trading trends

Every trader loves a trend. They’re easy to spot and easy to trade. Open positions require little management, as the movement is consistent and the expected retracements generally don’t comprise more than 5% to 10% of the stock’s price. Best of all, profits tend to be highest in trend trading, with significant gains possible in a relatively brief span of time.

In fact, the only significant hazard to trading trends is to get in soon enough at the beginning, and exit before the reversal at the end wipes out too much of one’s profits. Compared to other trading hazards, that one is perfectly acceptable!

Range trading, on the other hand, offers lower profits for more work. Ranges must be charted and analysed, and then the trade must be managed more closely and exited quickly if the price movement heads south. There’s always the risk the range could morph into a trend in the wrong direction, wiping out a significant chunk of profits or causing an ugly loss before the position can be closed.

But trading ranges are more common than trends, and therefore there are more opportunities to range trade. The ratio of winning trades to losing ones also seems to be better in range trading. Although there are smaller profits, there are cumulatively more of them.

One of the most attractive features of range trading is that the entry points and profit objectives are perfectly obvious. It’s always simply the other side of the range. The trader buys shares at support and sells at resistance, then turns around and short-sells at resistance and covers the position at support. There’s never any guessing.

As well, an appropriate stop loss is also easily identified. It’s only necessary to note the strongest spike beyond the support and resistance boundaries, because if the price moves past that point, any open position should be closed. Of course, a stop loss calculated through other means is perfectly acceptable, as well.

When last analysed, Billabong International (BBG) had fallen beneath its previous trading range, between 10.00 and 12.00; beneath support at 9.25; and entered a new trading range, between 8.00 and 9.25, as shown on the chart, below:

As expected, after falling beneath the 9.25 level, the stock rolled down, closer to the 8.00 level, before returning to re-test 9.25 from beneath, as resistance. For four trading weeks—a solid month—the price fixated on the 9.25 resistance level. But resistance proved stronger than the bulls and the price has begun rolling down again.

Volume has recovered somewhat but not significantly, indicating no change in the current trend. Traders should watch for BBG to continue range trading, between 8.00 and 9.25, for a bit longer.

technical analysis by Craig Liles