A range-bound market is one in which price bounces between a specific high price and a low price. The high price acts as a major resistance level in which the price can’t seem to break through. Likewise, the low price is a major support level in which the price also can’t seem to break. The market movement could be classified as horizontal, ranging, or sideways.
ADX in a Ranging Market
One way to determine if the market is ranging is to use the same ADX discussed in the ADX lesson. A market is said to be ranging when the ADX is below 25. Remember, as the value of the ADX diminishes, the weaker trend is.
Bollinger Bands in a Ranging Market
In essence, Bollinger Bands contract when there is less volatility in the market and expand when there is more volatility. Because of that, Bollinger Bands provide a good tool for breakout strategies. When the bands are thin and contracted, volatility is low, and there should be little price movement in one direction. However, when bands expand, volatility increases and more price movement in one direction is likely. Generally, range trading environments will contain narrow bands compared to wide bands and form horizontally. In this case, we can see that the Bollinger Bands are contracted, as the price is just moving within a tight range. The basic idea of a range-bound strategy is that a currency pair has a high and low price that it usually trades between. The forex trader hopes to profit around the high price by buying near the low price. The trader hopes to profit around the low price by selling near the high price. Popular tools are channels such as the one shown above and Bollinger Bands. Using oscillators, like Stochastic or RSI, will help increase the odds of you finding a turning point in a range as they can identify potentially oversold and overbought conditions.