What is a Range and How to Define It
A trading range is a period when price oscillates between a clear horizontal resistance (range high) and support (range low) with no sustained trend. To define a range reliably:
- Use at least 2–3 well-tested touches of highs and lows on your chosen timeframe (e.g., 1H, 4H, daily).
- Measure width (high minus low) — this gives targets and stop distance.
- Confirm low directional bias: momentum indicators (RSI, MACD) should be neutral-to-choppy, and volume often contracts during rotations.
Identify Range High, Range Low, and Equilibrium
Range High: the horizontal level where multiple rally attempts stall and reverse. Look for cluster of wicks or rejection candles and often higher volume on rejections.
Range Low: the floor where sell pressure eases and buyers consistently step in. Confirm with bounces and tails on candles.
Equilibrium (midline): the midpoint of the range, VWAP, or the volume point of control (VPOC). It acts as a magnet where rotations settle and where mean-reversion trades often take partial profits.
Recognize Rotation Behavior Inside the Range
Rotation looks like repeated swings between the two boundaries with these traits:
- Lower volume on moves away from boundaries and higher volume into support/resistance.
- Shorter swing durations and relatively equal amplitude up and down.
- Indicators oscillate without trending — RSI around 40–60, MACD flat.
- Price often pauses at the midline before resuming the swing.
When to Trade Mean Reversion vs Wait for Breakout
Trade mean reversion when:
- The range is well-defined and has held multiple times.
- Price reaches support or resistance with clear rejection patterns (pin bar, engulfing) and confirmation on volume.
- Momentum indicators show overextension on the entry side (e.g., RSI oversold at support).
- Risk-to-reward is favorable: target at the midline or opposite boundary with stop just beyond the range edge.
Wait for breakout when:
- Volume expands on the break and price closes beyond the range on your timeframe.
- There is follow-through (a second breakout candle) or a successful retest of the broken boundary as support/resistance.
- Broader market context supports a directional move (trend on higher timeframe, news catalyst).
Practical Trade Rules and Risk Management
- Position sizing: risk a fixed percentage of capital per trade (commonly 0.5–2%). Calculate size based on distance from entry to stop-loss.
- Stop placement: for mean reversion, place stops just outside the range boundary (e.g., 1–1.5x ATR beyond the high/low). For breakout trades, place stops below/above the retest low/high or use a multiple of ATR.
- Targets: partial profit at the midline, full profit at opposite boundary or use measured move after breakout (range height projected).
- Max exposure: avoid holding full position through major economic releases or earnings; reduce size if volatility spikes.
- Trade plan: predefine your entry, stop, target, and acceptable invalidation before placing the trade.
Invalidation Examples
Mean-reversion invalidation:
- Entry: long at range support with stop just below. Invalidation: a close below the support on increased volume — treat as failed range and exit immediately.
Breakout invalidation:
- Entry: buy on breakout close above range. Invalidation: price quickly reverses and closes back inside the range (false breakout). If the retest fails and price closes back below the boundary, exit and accept loss.
- Another signal of invalidation: breakout with low volume and no follow-through over 1–3 candles.
Summary Checklist
- Define range: 2–3 touches of high/low and neutral momentum.
- Identify equilibrium: midpoint/VWAP/VPOC to set targets and gauge bias.
- Trade mean reversion inside a stable range; wait for confirmed breakout with volume and retest otherwise.
- Use strict stops, size to risk, and treat closes beyond boundaries as invalidation signals.
Key phrases: trading ranges, range rotations, mean reversion trading, breakout confirmation
