Range trading essentially tries to capture the move in the market that is overbought, oversold, or at important resistance or support. The trader in this case is attempting to take advantage of the probability that the market has to correct or reverse a trend.
Examples include trading when the market reaches important support or resistance. Another approach is trading when the market shows overbought or oversold momentum (RSI, Stochastic). Overbought and oversold conditions can also be identified within bands such the Bollinger Bands. The trader makes the assumption or assessment that the market will remain in a range, so that when prices are near the boundary of the range, there is an opportunity to trade it back towards the mean, or perhaps the other boundary.
However, when the market starts trending, the market will not reverse, or would reverse insignificantly. Below are some examples from the past of 3 periods where range trading would have been appropriate.
A price range in the 2010 summer of USD/CAD, eventually broken to the downside in October.
June-July 2010: When the GBP/JPY tested the bollinger bands in the 4H time-frame, the market reverted to the mean (middle line), and somtimes reversed to the other band. The market however started a sharp rally and failed to revert to the mean to the right of this screenshot.
In Jan 2011The EUR/USD weekly chart shows large ranging action since 2008. The RSI showed overbought and oversold levels, and foreshadowed large reversals. Based simply on this signal however, would have proved disastrous to the range trader to the left of this chart. Earlier in 2008, the EUR/USD has been in a sharp rally since 2006, and the RSI has reached above 70 many times. In this period, there were very small dips, followed by strong bullish continuation.