Swing Trade Range-Bound Stock Strategies

By Michael Griffis, Lita Epstein

Unlike the typical position trader, a swing trader is more likely to use countertrend strategies and actively participate when a stock is range bound. The swing trader tries to make trades based on price movements from the bottom to the top of the range and back down again. You can use either daily or weekly charts to identify the trading range.

[Credit: Chart courtesy of StockCharts.com]

Credit: Chart courtesy of StockCharts.com

Your trading approach to range-bound stocks is similar to the one for trading a channeling stock. As the stock price approaches the support level, which is just above $59.00, you have an opportunity to take a position. You can use the a few approaches to enter a position.

You can, for example, simply choose to place a buy order using a limit price just above the support line. Another approach that may give you a little more control and provide better entry and exit points is to monitor the stock to find pivot points as it trades near the support line.

A pivot point is a three-bar pattern in which the low price of the middle bar is lower than the lows of the bars on either side of it. The entry and exit points for this kind of trading are similar to the ones used for trading based on a pullback pattern.

After identifying a pivot point, you enter an order on the next bar. The protective stop is placed either immediately below the low of the pivot bar or just below the support channel line.

Using intraday charts is another way to fine-tune your entry point. As the stock approaches the support line, you enter a position as soon as you see a reversal pattern on the intraday charts — for example, a higher high and a higher low, or a gap higher.

You exit these kinds of positions when the stock reverses near its resistance line. You can then take a short position in the stock — using any of the entry techniques described earlier — or wait for the stock to return to the support line to initiate another long position.

If the stock breaks through its upper resistance level, you interpret that condition exactly the way a position trader does — a very bullish indication that the stock is likely beginning a new trend, immediately closing any open short positions and converting to a trend-following strategy.