In general, the trading range will be defined on a larger-scale timeframe while traders will look for entry opportunities on lower timeframes. One thing that must be kept in mind when trading ranges is that the price can very often act in choppy and unexpected ways. Still, as long as the price is contained within the range the support and resistance zones would still be valid.
There are certain characteristics of price behavior that are specific to range trading and some trading indicators and tools that work particularly well when the market is ranging which traders can use to successfully exploit such situations in the market. Aside from using the basic lines on the chart to define the range with support and resistance levels, other indicators can also be used to help us determine if a specific market is trending or ranging at the moment.
Probably one of the most famous indicators for determining the state of the market is the Average Direction Index or ADX. This tool basically shows how strong the current trend is, where values of 25 and greater are an indication that there is a trend in the market while ADX values below 25 indicate that the market is ranging.
You can read more about the ADX in our article that specifically covers this diverse and handy indicator. Some people also like to look at moving averages to define if the market is trending or ranging. The basic logic behind this approach is to watch the slope and the order of the moving averages. Overlapping moving average lines suggest the market is ranging, while situations where moving averages are nicely lined up and pointed in the same direction are a sign that a strong trend is in place.
Chaotic moving averages are a sign of ranging market blue 50 - period ma, orange - period ma and red - period ma. Since trend trading is far more popular, let's first examine how trend traders can benefit from FX. What is trend?
The simplest identifiers of trend direction are higher lows in an uptrend and lower highs in a downtrend. Regardless of how one defines it, the goal of trend trading is the same—join the move early and hold the position until the trend reverses.
The basic mindset of the trend trader is "I am right or I am out. If it doesn't, there is little reason to hold onto the trade. Therefore, trend traders typically trade with tight stops and often make many probative forays into the market in order to make the right entry. By nature, trend trading generates far more losing trades than winning trades and requires rigorous risk control. The usual rule of thumb is that trend traders should never risk more than 1.
On a 10,unit 10K account trading K standard lots , that means stops as small as pips behind the entry price. Clearly, in order to practice such a method, a trader must have confidence that the market traded will be highly liquid. Of course the FX market is the most liquid market in the world. Furthermore, the FX market trades 24 hours a day five days a week, eliminating much of the gap risk found in exchange-based markets. Certainly gaps sometimes happen in FX, but not nearly as frequently as they occur in stock or bond markets, so slippage is far less of a problem.
When trend traders are correct about the trade, the profits can be enormous. This dynamic is especially true in FX where high leverage greatly magnifies the gains. Compare that with the stock market where leverage is usually set at , or even the futures market where even the most liberal leverage does not exceed It's not unusual to see FX trend traders double their money in a short period if they catch a strong move. Of course few traders have the discipline to take stop losses continuously.
Most traders, dejected by a series of bad trades, tend to become stubborn and fight the market, often placing no stops at all. This is when FX leverage can be most dangerous. The same process that quickly produces profits can also generate massive losses. The end result is that many undisciplined traders suffer a margin call and lose most of their speculative capital. Trading trend with discipline can be extremely difficult.
If the trader uses high leverage, they leave very little room to be wrong. Trading with very tight stops can often result in 10 or even 20 consecutive stop outs before the trader can find a trade with strong momentum and directionality. For this reason, many traders prefer to trade range-bound strategies.
Please note that when I speak of 'range-bound trading,' I am not referring to the classic definition of the word ' range. This can be a very worthwhile strategy, but, in essence, it is still a trend-based idea—albeit one that anticipates an imminent countertrend. What is a countertrend after all, except a trend going the other way? True range traders don't care about direction. The underlying assumption of range trading is that no matter which way the currency travels, it will most likely return back to its point of origin.
In fact, range traders bet on the possibility that prices will trade through the same levels many times, and the traders' goal is to harvest those oscillations for profit over and over again. Clearly, range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position. A range trader may decide to short the pair at that price and every 50 pips higher, and then buy it back as it moves every 25 pips down.
Their assumption is that eventually the pair will return to that 1. However, as we can see from this example, a range-bound trader will need to have very deep pockets in order to implement this strategy. In this case, employing large leverage can be devastating since positions can often go against the trader for many points in a row and, if they are not careful, trigger a margin call before the currency eventually turns around.
Fortunately, the FX market provides a flexible solution for range trading. Most retail FX dealers offer mini lots of 10, units rather than K lots. Even better, many dealers allow customers to trade in units of 1K or even unit increments.
Under that scenario, our range trader trading 1K units could withstand a 2,pip drawdown with each pip now worth only 10 cents before triggering a stop loss.
Clearly, range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position. A range trader may decide to short the pair at that price and every 50 pips higher, and then buy it back as it moves every 25 pips down. Their assumption is that eventually the pair will return to that 1.
However, as we can see from this example, a range-bound trader will need to have very deep pockets in order to implement this strategy. In this case, employing large leverage can be devastating since positions can often go against the trader for many points in a row and, if they are not careful, trigger a margin call before the currency eventually turns around. Fortunately, the FX market provides a flexible solution for range trading. Most retail FX dealers offer mini lots of 10, units rather than K lots.
Even better, many dealers allow customers to trade in units of 1K or even unit increments. Under that scenario, our range trader trading 1K units could withstand a 2,pip drawdown with each pip now worth only 10 cents before triggering a stop loss.
This flexibility allows range traders plenty of room to run their strategies. In FX, almost no dealer charges commission. Customers simply pay the bid-ask spread. Furthermore, regardless of whether a customer wants to deal for units or , units, most dealers will quote the same price. Therefore, unlike the stock or futures markets where retail customers often have to pay prohibitive commissions on very small-sized trades, retail speculators in FX suffer no such disadvantage. Whether a trader wants to swing for home runs by trying to catch strong trends with very large leverage or simply hit singles and bunts by trading a range strategy with very small lot sizes, the FX market is extraordinarily well suited for both approaches.
As long as the trader remains disciplined about the inevitable losses and understands the different money-management schemes involved in each strategy, they will have a good chance of success in this market. Bank for International Settlements. Advanced Technical Analysis Concepts. Day Trading. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. Get In Early. High Leverage, Large Profits.
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The price then reverts to its original track. Figure 5 shows an example of a breakout of a channel in the direction of the range itself. This happened during an announcement by the US Federal Reserve. The price does fall back within the range shortly after making a break of some pips upwards.
For the reasons above, depending on the range slope and the currency pair, some traders prefer to trade one direction or another, rather than trading both ways. Continuation ranges are chart patterns that occur within trends. These include pennants , flags , wedges and triangles. These kinds of ranges usually mark a correction against the predominant trend.
They can be either bullish or bearish signals. These patterns can occur at virtually any timescale. They can be traded as ranges in their own right, or as breakouts — depending on your trading time horizon. These patterns can produce strong bullish or bearish breakouts when the prevailing trend resumes, so many prefer to trade them as breakouts rather than ranges.
With most ranges, the pattern is not obvious on first sight. In such formations, the price movements take place around an central pivot line with support and resistance areas forming around it. Tools such as trend line analyzers and moving averages are useful in marking out these ranges and identifying where the support and resistance areas are.
Some traders prefer to trade these kinds of ranges towards the central pivot axis rather than at the extremes. In this way, they aim to trade out extremes of price on the assumption that it will revert to a mean the central pivot axis. For more on this technique see this article on pivot trading. With this strategy, you use a smaller profit target and seek to capture the price movements as the price pushes towards the central axis of the range.
As mentioned above once the price hits the range wall, the chance of breakout or partial which hits a stop loss is always there. Therefore, by trading at the edges of the range the trader is relying on the price turning successfully in their favor. By trading the central area, you can reduce the risks of turns at the edges of the range. In most situations, the price movements in a range deviate around a center line.
Setting your entry and profit target away from the extremities improves the chance of reaching your profit target. It also increases the number of tradable opportunities that you will have. The downside though is that it will reduce your potential profits on each trade. If something looks too good to be true it probably is; if the range looks like a sure thing it could be due a breakout at any moment.
Range breakouts are rarely clean and decisive. This is a reality that will complicate any breakout or range trading strategy. Failed breakouts mean the price will often break then descend back into the range. There are indicators available for handling and detecting range breakouts. Range breakouts can be strong and will take profits along with them. If you are caught the wrong side of the move, it is best to cut the loss and wait for another entry opportunity. Likewise, it is best not to try to trade back towards the range after a breakout.
With well-established ranges, several retests of the boundary are common before a full breakout. Use the retest as an exit opportunity. For this reason, we avoid the trade when a break looks possible even if the price moves firmly back inside the range. This margin of error means giving up some profit, but it leads to fewer loss trades. This ebook explains step by step how to create your own carry trading strategy.
It explains the basics to advanced concepts such as hedging and arbitrage. This part seems unclear to me. Breakouts often take a few attempts. Useful info! When you say avoid obvious setups can you expand on that? Does that mean then where the range looks so clean that it cannot really continue like that and must be a break? Yes exactly. This means where the trade looks like a given in reality probably the opposite is true. With ranges they do look obvious after the event once the move has already take place.
For example you can get a breakout on a lower range, but in fact it is just a continuation of a range the next level or two up. When entering the trade think about the other side. Start here Strategies Technical Learning Downloads. Cart Login Join. Home Trading Learning. Figure 1: Horizontal box channel.
Figure 2: Using indicators to find range reversals. Figure 3: Upward diagonal range with breakout.