Demystifying trading range

Over the last two months or so, the Indian markets are seen moving in a broad range and within this broad range, there has been yet another range developed since the third week of March 2021. 

Nifty, from its recent lows of 14,151, staged a smart comeback as it has registered gains of more than 600 points from the lower levels. Despite this strong recovery from the lower levels, it is still trading within the range.    

As per the statistics, markets do not trend very often but only 30 per cent of the time. Hence, it’s important to have a decisive plan when markets trade in a range.   

In our article, we will share an important observation of, ‘trading range-sideways price action’.  The trading range is a phase of consolidation and markets keep rotating between the trending and range phase.   

Why does it enter into a range phase (consolidation phase)? Let’s assume that are you’re riding a bicycle uphill and after riding for a certain time, you reach a point where you think it would be a good place to rest and rejuvenate your energy. You take a breather for a while and continue riding if you have the strength or else, you may quit and skid downhill. The market works exactly in the same manner. Price trends up for a while and then enters into a consolidation phase (range) either to resume or reverse the prevailing trend. 

The wicks (shadows) are an important characteristic of the range. The tThe trading range is filled with wicks, especially right at the extreme end of the range. The prime cause behind this is the repeated failure. The top wick signifies that the buyers have failed to take the price higher as they were overwhelmed by a strong supply while the bottom wicks mean that the sellers have failed. When the price is being pushed up to the higher end of the range, sellers are letting it to run-up, to see how far the price can move. If it inches higher, it would fetch more profits for the sellers when they sell into it. Hence, as the price is approaching the upper end of the range, it tends to accelerate. However, don’t get fooled that the sellers have given up. In fact, they are testing how much power do buyers have and when they realise their point has come that each buyer’s order is filled and no more buying is left in the system, they will jump in and push the prices lower. As a result, a decent bullish bar would turn into a shooting star at the close of the bar. Its vice-versa would prove to be true when the price tests the lower end of the range and because of this, we would end up seeing a hammer formation or a candle with a long wick at the lower end of the range.   

Here is the price chart of Nifty and this would give you more clarity as in what we are actually trying to convey.   

In the above chart, we have highlighted candles that help us to understand as and when the price reaches near the extremes of the range, we witness the formation of a wick.    

Basically, when any security is stuck in a range, the wick is a very important point to notice. As and when a wick is formed, as a trader, we can take note of that and assume that the prevailing force within the range is about to turn, and the price could move to another side of the range from thereon.