Range trading strategy is one of the tools exclusively used by binary options traders trading the In/Out option. This type of trading is all about predicting an asset value based on a specific range. Until the expiry of the contract time period, the chosen asset value must necessarily remain within the boundary or range if the trader wishes to make a profit out of his investment.
Four possible outcomes are possible with the range trading strategy depending on the broker you work with –
- The option is said to end outside the range and in the money if, upon expiry, the price action is not within the chosen price boundaries.
- If the price action is within the price range selected by the time the contract expires, the option is said to be in the money and ending within the range.
- Price action will not breach boundaries if it remains within the price boundaries.
- To make a profit from the trade, traders usually seek breaching of the chosen price boundaries by the price action of the currency just once.
At any particular point of time, range trading strategy offers binary options traders a chance to choose the best trade suited for him.
Using the range trading strategy effectively
Deciding on the range to use is the first step towards successfully using the range trading method. The best time to use this strategy is when there is consolidation in the market, which means the market is not trending and only trading sideways.
Predicting a price ceiling or floor is very difficult in a market with falling and rising prices. This in turn severely limits the ability of the trader to profit from the trade.
There are many effective indicators, such as the Bollinger Band that helps traders detect a market that is range-bound. These indicators help you identify the direction taken by the trading asset. Confines of movement of price are shown by the upper, middle and lower bands in the Bollinger band in a consolidating market.
Smart traders use graphs and charts to determine the stability of a particular asset value over a period. Riskiest assets are those that see a lot of volatility. During the contract time period, it is very difficult to predict price of highly volatile assets.
When there are chances of erratic values due to asset news, it is advisable for traders to refrain from choosing boundary trades. It is possible for traders to be updated with market news related to specific assets which can make their choice of trades easier, though it may not be as easy to predict events like natural disasters.
In a nutshell
Range trading helps traders trade in many more options other than the boundary trade, such as the Touch/No Touch option contract. In order to ensure that there is no chance for the price of the underlying asset to come close to your price barriers, it is important to take time setting a downside or upside barrier outside the price range set by price ceiling and floor price. In order to make price action breach ranges, traders can adjust the price barriers.