Despite significant volatility in the market over the last year, stock prices have basically gone nowhere. And prospects for next year look none too rosy as the economy sags.

So how does one profit in this market? It's not easy, and buy-and-hold is far from a compelling answer. But there is one approach that may help investors lock in gains from the sideways market, and it could very well involve stocks you already own.

Though systemic economic troubles will likely keep stocks from rallying over the next several quarters, equities will nonetheless continue to move actively within certain price ranges, says Mark Scheffler, a senior portfolio manager at Appleton Group Wealth Management. And trading within that range is how investors can make money, he says.

When stocks are range-bound for several months, Scheffler has observed a whipsaw effect as they reach their short-term peaks or troughs.

"At these inflection points," he says, "stocks tend to be more reactive to fundamental company or broad economic news. And this sensitivity tends to be noticeable when the market is broadly in a flat, trendless way."

This makes capturing a 10% or 12% gain over the short term a reasonable possibility. But it also means investors will have to adjust the way they invest-and adjust price targets to match current reality.

To help ensure this approach works, advisors need to first identify solid, profitable companies whose stocks have demonstrated clear trading patterns over the past several months. As they break lower, consider buying and then selling into a modest rebound. A stock trading at $20 needs only to inch up to $22 for a 10% gain.

Phil Roth, a technical analyst at the institutional trading firm Miller Tabak, sees merit in trading within a range. He agrees that having modest, disciplined price targets can help ensure investors sell out of a position before a stock's pattern breaks. But he cautions that "the longer a stock demonstrates a cyclical pattern, the sooner it may break out of that pattern-up or down."

Roth prefers a different trading approach. He targets returns of 20% or more by recommending a stock when it breaks out of the top of its range-a standard technical trading strategy. He focuses on stocks demonstrating widening daily trading ranges as prices are trending higher on increasing volume.

To limit downside risk, he applies stop-losses at around 8% below his purchase price. So if he's right only half the time (which he is), these basic rules help him achieve attractive total returns in virtually any market.

Look At What You Know
It's not hard to find stocks suitable for this trade. If you've followed a stock for years, you may have a pretty good sense of its pulse-how it moves and how it responds to the broad market. So check your existing portfolio, even your losing positions. You may find a potential winner.

Take preferred stock. Preferreds are interest rate- and credit-sensitive securities, and they have been as volatile as common stock during the financial crisis, creating unique opportunities as the market again recognizes their original purpose as income plays.

The London-based global bank, HSBC, for example, has a $50 preferred share, series Z, trading on the New York Stock Exchange. At par, it yielded 5.72%. The stock tumbled to $29 in spring 2009 because of a broad fear banks would not be able to pay their dividends. This decline produced a current yield of 9.86%. The stock has since steadily rallied, and over the past year it has been trading between $38 and $46. Between May and July of this year, the range narrowed even further, and it was trading between $39 and $44.

At the beginning of July, it broke below $40, dragged down by increasing doubts about the economic recovery. But HSBC survived the banking crisis in good shape, emerging as one of the strongest global banks. Its capital and liquidity are solid. And the current yield on its preferred shares was more than 7%-a dividend taxed at the low 15% rate.

But what made this particular preferred even more enticing is a feature that makes it almost as safe as a bond. Say the bank gets into so much trouble that it must suspend its common stock dividend and all of its other preferred dividends-something that didn't even happen to the Royal Bank of Scotland, the poster child of the banking crisis. When it eventually gets back on its feet, HSBC would have to pay back all missed dividends on the Z shares before it could pay one penny on the common share. And for a bank not to pay a dividend on its common shares is anathema to its core institutional investors.

When the HSBC preferred share fell under $40 in late June, it was yielding six times more than the top money markets, and all these characteristics gave it a remarkable safety net, which the market wasn't properly valuing. The stock quickly bounced off this near-term low after the company announced healthy second-quarter results and got a favorable review from the European Commission's bank stress test, climbing 15% in just six weeks, several points past its range-bound high.

Not Cherry Picking
Skeptics may think range-bound trading is based on cherry picking performance after the fact. But patterns provide us with information: rings in a tree trunk, cirrus clouds, an electrocardiogram. Stock charts are evidence of current market sentiment.

Reading trading patterns is not an exact science. It must be done within the context of a firm's health and broad market and economic conditions. When investors are dealing with solid, profitable companies in a free market, certain price movements can suggest near-term moves. But investors must move decisively.

Ron Sloan, fund manager of the $4.9 billion Invesco Charter Fund, says range-bound trading requires considerable discipline in tracking, buying and selling stocks. Though he's a buy-and-hold investor, he's starting to use this shorter-term strategy to trade around existing positions as a means of locking in modest profits when core holdings are not moving.

A key reason he has modified his thinking: Market cynicism is undermining some companies' share price performance despite their attractive fundamentals. Look at Intel over the past four quarters. It has consistently topped consensus earnings estimates, rising sequentially from $0.33 in the third quarter of 2009 to $0.51 in the second quarter of 2010. June's figures blew past those of the previous quarter by $0.09, or more than 20%. And yet, since mid-April, the shares have continued falling from their $24.37 peak. Not even the blowout second-quarter earnings figures could stop the decline, though they offered a small, temporary boost to the stock from $19 to $22. In August, the stock broke below $18.50.

"Because this market doesn't seem able to sustain positive news," observes Sloan, "selling immediately into such announcements may be the best way to preserve wealth."

He says he wouldn't be surprised if this kind of behavior continues into next year, suggesting a need to consider the merits of short-term trades with modest targets. Another way to prop up returns in a range-bound market, say many money managers, is to sell "out-of-the-money" calls. This allows a manager to collect a premium by allowing other investors the right to buy a stock he owns at a price above current market levels. By setting the strike price also above the trading range and limiting the duration of the option to a short time frame, the share owners can collect extra percentage points of yield without having to sell shares at an unattractive price. Managers can sell puts below a stock's price range for the same purpose.

Broader Approach
There is typically less advantage in trading indices because they tend to be less volatile than individual securities. But foreign country funds offer some added pop with the foreign exchange volatility.

This past spring, the Australian dollar rallied above $0.93 in mid-April. But the sudden global sell-off in all risk assets sent the Aussie currency plummeting by 12% in less than two months as investors rushed into U.S. dollar securities. By early June, the Aussie dollar had fallen to nearly $0.81.

Before the currency sold off, the Australian iShares, which tracks the country's MSCI index in U.S. dollars, peaked for the year above $25 in mid-April. One month later, the index had lost nearly 25%, hitting a 2010 low of $18.47. The index was hit by both the sell-off in the local currency and a comparable loss in local shares. This collapse was driven largely by fear, not the country's fundamentals, which are among the strongest of any developed market. (See our article in the August 2010 issue of Financial Advisor, "Up Down Under.")

The panic suggested there was likely potential value in both the currency and stocks. Over the following weeks, as the fear subsided, both the Australian dollar and stock market rebounded. In early June, they both retested their recent lows but did not break through them-a good technical sign, suggesting a bottom is forming.

The Australian dollar and stocks then rallied higher with the MSCI index hitting nearly $21 before retreating back toward $19. This produced another positive pattern: higher highs and higher lows. The index yield of more than 4% made the trade even more attractive.

If an investor had purchased the index at $19, he would have earned more than 10% by the first of August as the fund broke above $22. One can't overemphasize the need to sell once a target is hit. The strategy is frequently compromised when investors hold out for additional gains that don't materialize in a range-bound market.

Another way to manage risk is to split an investment into two tranches. If the stock breaks down below the initial purchase, an investor can buy additional shares at a lower cost to increase the odds of a winning trade. This strategy could limit total gains if the stock immediately rallies and the second tranche can't get placed at a lower price. But it protects against unpredictable downward spikes that the market is prone to during bouts of range-bound trading.

It's also helpful to use stop-losses to limit risk. But if you set them too narrowly, at 8% below cost for instance, you can get sold out of a trade very quickly. If you set them too far away on the other hand, say at 20%, the strategy won't be as effective. A simple rule: Stop-losses must reflect an investor's tolerance for risk.

In the long-term, a stock ultimately reflects the fortunes of the company-its strengths and weaknesses. But over a period of several months, when the broad market is indecisive, there can be disconnects due to investor confusion and lack of conviction. Range-bound trading can exploit the volatility stemming from this lack of clarity-a condition that could be with us for some time to come.