|Resistance||The price level at which traders believe the instrument is overpriced and begin selling. Oversupply causes prices to fall. The more often an asset fails to break resistance, the stronger it is perceived as.|
Ranging Markets - text
A ranging market is essentially a market that has established its trading between two certain prices. It has found a bottom and a top for the time being. The top and the bottom are also known as the support and resistance. In a ranging market, the market will in essence, bounce up off the support and bounce down of the resistance.
To be able to call it a ranging market it needs to trade within that range over a number of different time frames, whether it is a minute or monthly chart.
Also the gap in prices that it is trading between can vary, it could be 5 ticks wide, or 50 ticks wide as long as it stays between two prices its it known as a ranging market.
How does it become a ranging market?
The most common reason for a ranging market is market indecision, it essentially is telling us that the market neither wants to break beyond a certain price to the upside nor break past a certain price to the downside.
Why is the market indecisive and trading between two prices?
Well this could be caused by a number of different factors that were mentioned earlier.
When a ranging market reached a support level, this may signify that the market is on oversold territory i.e. at a price level which believes the real value of the product being traded.
Similarly, when a ranging market reaches a resistance level, it may be a sign that the market is in overbought territory, or a price level which is higher than the real value of the market.
There may also be periods when the market tends to go quiet, possible as a result of a there being no fundamental factors driving the price.
If there have been no news releases reporting any major changes in export demand, or production figures, and no geo-political or weather factors to alter either, the market is not likely to have the impetus to move beyond certain levels, thus inhibiting the price action and volatility.
Such circumstances with a lack of fundamental news, a number of market speculators may have less incentive to be involved in the market.
The impact of this could be evident in a lack of volume, momentum and/or conviction to move markets.
The next step is a matter of waiting for Fresh fundamental news.
A surge of volume and market momentum is needed to move to market out of this range, so always be cautious and be anticipating any news that is due to or might be released.
In a situation when a market breaks a key level to the upside or the downside, the market may move heavily in the direction of the newly established trend, creating possible opportunities for you to make profit in the market.
If both support and resistance prices are holding well then the strategy playing the range is a viable option, this is when a trader buys near the support, and then reverses the trade to be short near the resistance and this can continue for a while.
The main concern here though is that being long on a low or short near a high can be dangerous, so if either level is looking to break then you need to get out of that position quickly.
A ranging market is by no means a bad thing; if a ranging market can be identified early on it can be a very profitable.