Enter the Trading Range.

As the Nifty drifts into a trading range (boundaries 4450 to 4585) day traders and short term traders will find it difficult to catch tradeable moves. This is the nature of the trading range. For the Nifty, the small 135 point range is unlikely to hold. This suggests that the range will expand to become larger by either moving up to establish new resistance, or moving down by establishing lower support. We will let the market decide it.

The theory of trading inside a range is fairly simple. Apply a bounded momentum indicator like the RSI, CCI, Stochastics on an intra day chart. Day traders should use 5 minute or 10 minute charts. Wait for the indicator to reach ‘oversold’ area. Then go ahead and buy above the high of the previous bar. Keep a stop a little below the low of the recent move. You exit when the indicator begins to touch the ‘overbought’ area.

Is there a risk in such trading? Not in the way you think. Since the trade has stops and an estimated location for taking profits, the trade works well in trading zones. The risk lies elsewhere. At some point, prices will move out of the trading range. Since you have taken profits or have been stopped out, you will find that a trending move has started while you are out of the market. That’s the risk! Now, a solution to this is to wait patiently for the first pullback and get into the trend. yet, there is a psychological setback on having missed part of the trend. Tradrs have to face such real life situations every day. When you are able to find your way through the maze of such circumstance, you will become an efifcient, profitable trader.

I received a comment today which roughly said “Nothing new in this analysis. This is a copy of what vivek patil said…… ” The comment was accepted, but now I cannot locate it. If you have RSS readers where you get this comment, please tell me where it is. Sorry for this lack of knowledge!

My Notes: Much to my regret, I do not read any Indian analyst. I have a reading list of blogs mainly in the USA. Often, I quote from them and give links. Thus, whatever I write is not copied.