Trend-following strategies produce good profit, when markets fall or rise. But when we face with range market conditions, such trading strategies give a lot of false signals for opening deals. What should we do? The answer is simple - we must have rules for range markets. Sometimes it's not easy, and trading in range need more knowledge, experience and deep analysis than trading in the direction of the main trend. But we should use such market conditions and make profit. First of all we have to identify, when we have range market conditions.
We have range market conditions, when: - 3 Moving Averages with periods 20, 50 and 100 don't move in one direction. They are close to each other and intertwine - ADX is below level 20 or 25.
When we meet such conditions, we have range market. We must not trade based on reversal signals from Moving Averages. For range markets we look for reversal signals only from Bollinger Bands. RSI and MACD must confirm price reversal. We focus on price action near Bollinger Bands and it's better to have strong support or resistance levels which could stop price. We should look at higher time frame and get confirmation that market is in range also or just bulls or bears have no power for moving price against our potential trade. If we open trade based on range rules, but on higher time frame we have trend market conditions, we have good chances to close such trade with loss. Also note, if we trade in trend market conditions, we can have good Risk/Reward ration, in range our profit targets are close and for making profit we’ll need more profit trades. That’s why we need more confirmation for opening trades. So, let's look at the rules of trading strategy for range market conditions.
Komen
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Every time, when price touches and moves out of Bollinger Bands, we get good trading opportunity. Here is the instructions how to use range signals. Follow each item, it is important: 1. First of all we identify trading conditions - it's trend or range. If it's trend, look at another market. If it's range market conditions, we go to the next step 2. Wait for the moment, when candle will touch one of Bollinger Bands and close outside the bands for better reversal signal 3. When candle reverses and closes inside of Bollinger Bands, we'll need confirmation from indicators 4. RSI and MACD must confirm reversal, and for better signal RSI should reverse above 70 for sell trades and below 30 for buy trades 5. When we have reversal signal from Bollinger Band with RSI and MACD confirmation, we'll place pending order below the low of the signal candle for sell trade and above the high of the signals candle for buy trade. Please note, the signal candle, it's a candle where we have everything for entry: price reversal, MACD and RSI confirmation. 6. Place stop order above the nearest high of price movement for sell trade and below the nearest low of price movement for buy trade 7. Profit targets are the opposite Bollinger Band or support and resistance levels
Look at the chart above and study 5 trades based on the trading strategy rules for range market conditions. You can search for the signals on minutes, hour and daily charts. If you have questions about trend signals, please write in comments. I will be glad to answer all your questions.
First of all, thank you very much for detailed explanation. How much do you customize inputs for indicators? For example, are you using ADX length 14? Vitek
harilaos
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Excellent presentation, a question, the way I read it RSI gives the signal, MACD follows with a lag, still giving irritating signal… am I right? I would appreciate your answer.Thank in advance, Harry
DLavrov
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Harry, thanks a lot! As for your question, we need confirmation from 2 indicators, in such way we can filter more false signals. But if we talk about which indicator is more importent - it's RSI. MACD histogram works also good and only MACD lines follow with lag.
harilaos
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Thank you, so if I understand correctly at your strategy you use 1st RSI, 2nd DMI, 3d MACD and all within the bollinger band. Preferably in which frame, 15 might so opposite readings to daily ? Harry
harilaos
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… might show opposite...
DLavrov
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Harry, as for indicators, we need DMI only for confirmation that we have range market conditions and that's all. If ADX, which is the part of DMI indicator, rises above level 20 or 25, we won't trade based on range rules. The 1st thing is - price action near Bollinger Bands. When price reverses from Bollinger Band, we'll need confirmation and look at RSI and MACD. As for the preferably time frame - 1H and 4H. If you need more details, please, write )
Nejra
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@DLavrov,
Thank you for your detailed tradingviews. I am studying everything.
In your other view [trend market conditions] you talk about MACD being the most important indicator. Is MACD the important one in trending markets, while RSI being most important in ranging?
Or did you change your view on these indicators?