In this post, we will discuss the Support/Resistance or Range Trading Strategy. The first thing you need to know is when to apply this strategy. You apply this strategy when you have confirmed that the stock has entered a range/consolidation. This is also known as an area pattern. Usually range trading strategy comes after the stock hits resistance, churns near resistance (which is when we apply the daytrading/scalping strategy), and breaks the shortest-term support on the daily chart. Take a look at the sample chart of BIDU below.


Another confirmation that we have entered the "zone" for a range trading strategy is when the MACD does a crossover to the downside (loss of momentum) and corrects to OR near the zero area (momentum, though it has waned, is still positive). Basically this means that the stock has already achieved its magnitude in terms of its move, and needs duration or time to make up for any exaggerated moves. This is why the stock goes into a consolidation period and thus we trade the ranges.

The range trading strategy is similar to the buying on pullback strategy, the only difference is that the buying on pullback strategy is pulling back from a new high, so it has enough momentum to SOMETIMES rise above resistance and into a new high. If the buying on pullback strategy doesn't lead to a new high after the bounce, then we have a range trading strategy. The buying on pullback strategy also doesn't fall below the 32-day moving average. For range trading strategy, you also have the tendency for the stock to churn longer at resistance (trapping more buyers) before the initial pullback, thus leading to the consolidation period.

The following are the steps to support/resistance or range trading strategy.
1) After pulling back from resistance, look for a support level. It could be either a moving average, parabola, a previous support, or a trendline.
2) Once it reaches support level, let the stock churn for at least 2 days to a weeks. If the support is at the 32-day moving average, it churns for a shorter period of time, at most 3-4 days. For 65-day and 130-day moving average, it could possibly (but not all the time) churn longer.
3) If the stock is holding at the 32-day moving average, it is preferable that the slow stochastics reading is below 20. However sometimes it is a little above 20.
4) Once in that churning area, identify the resistance level of that churning area.
5) If possible, try to identify the bigger area pattern that is forming.