Lesson 3 of 20 · 10 min
Range and Mean Reversion
Step 1
What it is
Sometimes price is not trending at all. It bounces between a clear top and bottom. Mean reversion means trading from one edge back towards the other.
It works only for as long as the range holds, and no range lasts forever. The stop is what protects you on the day it ends.
Traders use it because a range offers clear levels and, from the edge, a good reward compared with the risk.
Step 2
See it on a chart
Two tests of each side, and a third approach to the lower edge.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 3
The exact rules
What must be true before entry
- At least two tests of each side.
- Price at the edge, not in the middle.
- No surge of volume pushing through the edge.
What volume should show
Where to enter
Where the hard stop goes
Where the target goes
What invalidates the idea
- A close past the edge.
- The tests of the edge come faster and with more volume.
When not to take it
- The range is too narrow to cover costs and still offer 3:1.
- You had to redraw the range to make the trade fit.
- Major news is due soon, or you would be trading outside your planned hours.
- You have just taken a loss and feel the need to win it back.
Step 4
Your turn: plan the trade
Price has returned to the upper edge of a clear range. Mark your plan.
This setup is a short. Look at the candles and the volume. Choose a line below, then tap the chart to place it. You can also drag its label or type a price.
Illustrative chart with made-up prices and tick volume, built for teaching. It is not real market data and not a trade idea.
Step 5
The trap: refusing to accept the range is over
A range pays you a few times, and you start to trust it. Then it breaks, and it is tempting to add to the loser because it has always come back before. It does not have to. The stop stays where it is.
Read about revenge tradingStep 6