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Range trading strategies forex trading

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. High Leverage, Large Profits 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.

The Market Always Wins 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. Bound to a Range 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?

Range 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.

Solutions for Range Traders 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. To catch the range, prices have to get caught between support and resistance. When this occurs, traders can address the range in 1 of 2 ways and trade for the range to continue, which means the upside is limited or looking for the breakout from the range in the face of a new trend.

Trading Ranges or Looking for Breakouts: The Trade-Off Traders often ignore ranges as they perceive the profit potential to be restricted. If a range is being traded through buying support, then traders are nearing the position of resistance. This is a limited upside type of proposition. Of course, this does not have the lure of a trend or breakout where traders can get on the right side and risk up to 3 to 4 times their capital.

The reality of trading is that the range is the market condition likely to be encountered almost all the time. In the Middle of a Ranging Storm? Ranges can develop in multiple ways. For example, the short-term range is towards the start of an uptrend as buyers and sellers fight to fend off and gain control over the coming trend.

Another situation where the range may result is when a long bout of indecision leads to congested price movements that stay restricted between support and resistance levels. Regardless of the context, if prices are bound between resistance and support, then a range-bound period occurs in the markets. The goal behind the range trading strategy is simple. It is the same as when you are trading trends — the aim is to buy low and sell high.

Another requirement for range trading is that price action must be bound between resistance and support. If previously established support and resistance remain respected, a profitable position may be visible to the trader. Once you identify the prices at which buying and selling will take place, and when trading will stop, the decision to enter the trade can then be taken.

Again, seeking risk-to-reward ratios of 1 to 1 or higher is the way out. This ensures that prospective profit equals potential loss. Zones of support and resistance can ensure range-bound conditions are more feasible. Additional elements of support or resistance in the range include pivot points, psychological whole numbers, and more. Once traders have seen a price action swing around a certain price, validating the level of the price as one which markets have breached and may do so once again, range trading can be taken a step further.

Bear in mind that just as no trend is permanent, similarly, no range will last forever. Traders can use the information for benefits while trading ranges. If a trader guys support anticipating the continuation of the range and the opposite happens, traders need to take a second look.

If the breakout is not real and the range fills as the trader has anticipated, it could also rain away profits of trade runs to the stop. This is not the right way to handle a range. Some position management is needed in the event that a breakout could happen. Traders need to close a portion of the position for prices to reverse, and the remaining part of that position can reap the rewards if a breakout does, in fact, break out.

Scaling out of the trade is a similar step. If the breakout happens to turn into a fresh trend, the trader can step into a world of rising profits if the trend should continue. Trading Range — Bound Currencies This is more common than trading in range-bound securities, but exactly the same principles apply in both cases. The fundamental strategy involves finding support and resistance zones that are closely established and trading at these levels until the breakout inevitably occurs.

An abundance of information on its exchanges makes the US dollar a better choice for Forex traders. But regardless of the currency pair, the first step to create a range-bound trading stratagem is to assess defined lines of support and resistance. Optimal currency pairs are not quickly moving, allowing traders to react to either the 2-support or resistance. Traders can enter just long before the support price and place a stop just beyond this.

Entering short prior to the resistance boundary works in the opposite way. Currently, there is not much scope as far as the distance between higher and lower boundaries is concerned. This leads to limited upside potential, so entries and exits need to be set up quickly. Range trading is not about direction; it is all about identifying overbought and sold conditions within the range boundaries. From interest rates to government policies to those of the central bank, engaging in fundamental analysis forms the basis of successful range trading.

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The black lines display the high and the low of the range. You will notice that a couple of times the price action moves strongly above the range, but eventually reverts back. This type of pattern sometimes occurs after an economic news release. We want to focus on the range levels where the tops and the bottoms are concentrated. The red lines display the levels of your stop loss orders in relation. When you open this type of bounce trade, you should hold it until the price reaches the opposite level, or until the stop loss order is triggered.

This Range trading approach is considered a risky initiative. One reason for this is the absence of decent trading volumes during the range. This leads to price uncertainty as the pair could rapidly change its direction if a bigger buyer or seller suddenly hops in the market. Range Breakout Trading The Range breakout trading approach is another way to profit from a ranging market condition. The idea of this range trading strategy is to enter the market if the price creates a breakout through the upper, or the lower level.

You would enter the market in the direction of the breakout. If the breakout is bearish, you sell the currency pair. If the breakout is bullish, you buy the currency pair. You enter the deal on the assumption that the price is likely to create a trend after breaking out of the range. A valid Range breakout trading signal is accompanied by high or increasing trading volumes.

In this manner, you can use the Volume Indicator to confirm that the signal you get on the chart is a real breakout. When you trade the Range breakout, you should always use a stop loss order. Sometimes the prices will close with a few candles beyond the levels of the range, but then the price will quickly return back inside the range. As such, you always want to be protected by a stop loss order. I typically like to place the stop right in the middle of the range, and pursue a target at least equal to the size of the range itself.

This way I can achieve a Reward to Risk ratio of at least on this type of trade setup. If the price completes the size of the range, you can consider keeping a portion of your position open. In this case you would want to use basic price action rules to get your final exit signal from the trade.

The image covers the period between the last week of Dec, and the beginning of Jan, Again, the range is marked with the black horizontal channel on the chart. The red circle indicates a breakout through the upper level of the range. At the same time, we need to place a stop loss order in the middle of the range as shown on the image. Then we measure the size of the range, which is shown with the first magenta arrow and we apply it as our minimum target as shown with the second magenta arrow.

After the strong breakout, the price action reaches the minimum target. We measure the bullish move with the blue trend line on the chart , and can use that price action reference point to exit the trade, if we still have a portion of the position open at that time. We would want to close the trade completely when the price action breaks the blue trend line in bearish direction. This breakout trading strategy is commonly used among price action traders, and can be adjusted to meet your particular trading style.

Useful Indicators to Identify Non Trending Range Market There are some technical range indicators that are very helpful in recognizing flat markets. The indicator consists of a single line, which fluctuates from 0. If the line is located below When the ADX value crosses above You might enter a trade when the ADX line breaks the We would enter the market in the direction of the price move. Again, we need to place a Stop loss order in the middle of the range.

Then we need to hold the trade at least until the minimum target is reached. Of course we can always use the price action rules to extend our profit beyond the minimum target level. The black lines illustrate a Forex Range during low trading volumes. Notice that during most of the Range, the ADX line is located below We could look to enter a trade when the ADX line switches above This would hint that the Range is probably finished and the price is likely to enter a new trend.

Volumes should be increasing as well. But in which direction should we enter the market? Here, the Volume Indicator could be of help as well as the natural price action. In our case the Volume Indicator closes big green bars, which means that the trend is bullish.

At the same time, the price action is bullish as well. Our stop loss order would to be placed in the middle of the range per the outlined trading rules presented earlier. Then we need to hold the trade at least until the Swissy reaches the minimum target second magenta arrow. Alternatively, we have the option to hold the trade for further gains.

See that the volumes keep increasing after the minimum target is reached. We can use the bearish breakout through the blue bullish trendline in order to close the trade. The Bollinger Bands is a volatility based indicator.

It consists of two bands, which go through the tops and the bottoms of the price action, creating a channel, and a period Simple Moving Average in the middle. The price action dynamics are contained by the Volatility bands. Low volatility is usually caused by low trading volumes. High volatility is usually pressured by higher trading volumes. Alternatively, more experienced traders can look for trading range breakouts.

To open a trade inside a trading range, you need to time your entry. Traders can time range based entries by looking for clues that the support and resistance level is going to hold. In a range market environment, the overbought and oversold indicators work the best to time the range based entry. Now, which type of trading style you should choose between range trading vs trend trading?

It really depends on your trading goals and your personality. The trading strategy that is right for one trader may not be what's best for another. Remember, that your trading strategy should fit your personality. However, you still need to be equipped with the right tools to tackle the inherent risk that comes with online trading. Most traders are only familiar with trading based on bar charts or candlestick charts, which factors in the time element.

Below we introduce the power of range chart. See below: What are Range Bars? Range bars are a convenient replacement of the most popular types of charts bar chart, line chart, and candlestick chart. Range bars are used in technical analysis the same way as any other form of charting technique. These bars provide traders with a visual representation of the market price action.

For instance, with a time-based chart, each 5-minutes bar shows you the price activity for each 5-minute time period. These time-based charts will always print the same number of bars during each trading session regardless of volatility, volume or any other factor The first thing to note about range bar is that they take only the price into consideration.

Time can always be adjusted later on. So, how are the bars than created? Each bar represents a specified movement of the overall price. The size of the Forex range bar is specified by the trader. For example, if you have a pips range selected, each of these range bars is going to be equivalent to that range. So, each of these range bars is equivalent to pips. Range bars are very similar to Renko bars. In order to use a profitable Renko strategy, you really need to understand the basic foundation of a Renko block.

Both Range bars and Renko bars remove the time element to focus on the price, isolating the trend. So, what is the difference between range bars vs Renko bars? The Renko box is printed on the chart only when the price moves all in one direction from the opening price of the previous brick.

There is no clear answer to which one is better. Both range bars and Renko bars serve their own technical purposes. You may want to consider using both types of bars while trading. Let me explain how range bars are formed. By eliminating the time factor, we can better identify trading ranges. In this case, the range bar closes and a new bar is printed with the opening price at 1.

This new bar must have a pips range to close. These range bar examples are self-explanatory. Now, knowing how range bar came to life will give you a much deeper understanding of this ranging indicator. In , Vicente M. Nicolellis Jr.

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How to Trade a Ranging Market the Right Way

Range Trading Strategy For 28 Forex Pairs. When the forex market is not trending strong up or down, you can use range trading strategies presented in this article to profitably trade the . Trading the European Opening Range. To trade the European Opening Range strategy, you follow these three steps: 1. Find the European range for the current day. To do this, you’ll . Feb 23,  · The first step of the range trading strategy is to find the range. Forces of supply and demand can impact prices in the forex market, and this is where support and resistance .