Wednesday, April 15, 2009

Adapting to Range Bound Market Conditions

I've been in meetings all day with traders and, not surprisingly, the major topic that has arisen is the challenge of adapting to slower, more range bound market conditions. Between meetings I took this Market Delta snapshot of the market; it illustrates well so many of the identifying characteristics of range trade: the relatively flat VWAP (red horizontal line), the mixed volume at offer vs. bid (bottom histogram), and the bunching of volume at price (right histogram). As the Twitter posts have noted, we've also seen mixed performance among sectors, with some relatively weak (NQ, for example); others stronger (financial stocks)--as well as below average relative volume

Identifying range conditions as they're setting up is key to setting trading strategy--but it's also key to setting expectations. The slower the market, the less the movement, the more modest the expectations for any anticipated market move. More on this topic to come.


heywally said...

I love range markets because they favor my best style of trading - buying weakness (dips) and selling strength. You can manage the risk by taking relatively small positions and not waiting 'too' long to take profits.

The other good thing about a range bound market is that the volatility is lessened and theoretically, it instills confidence and brings more money back into the market (though more time is probably needed in this situation).

Trader Rich said...

Range market could be impatient trend followers worst enemy. Last Wednesday (4/8/09) cable formed a NR20/ID bar (the narrowest range in 20 trading days), it whipsawed both way the next day. Both bulls and bears got burned and stop hit. Finally after Good Friday, Cable showed its true intention - upward.

Forex Day Trading

Brett Steenbarger, Ph.D. said...


Thanks for the comments; range markets do indeed offer opportunity, particularly when volatility picks up. Many times there will be good swings in the AM and afternoon in a range market--