A vast majority of forex traders are seemingly looking for the most effective technique that works best for them. Range trading is regarded as a popular approach to the market and more people are working towards adopting it as it is a means to capitalize on what the forex market has to offer. Forex traders that trade in a range-bound market have to identify significant price levels using resistance and support lines. Additionally, moving averages and volume trends could also be employed. Range trading can generally be used at any time, but it works best when the market lacks direction with no apparent long-term trend insight. This strategy is at its weakest only during a trending market, precisely when the market directional bias is not accounted for. 2017 was a great year for range forex traders due to the frequent occurrence of sideways trending currency markets.
What is Range Trading?
Range trading in forex is a trading strategy that deals with the identification of overbought and oversold currency (i.e. identification of areas of support and
resistance). Range traders tend to buy during oversold/support periods and sell during overbought resistance periods. The strategy of range trading is about finding resistance and support lines. For example, to make a resistance line you can look at the historical highest prices for last year or other certain period and connect them with a straight line. The resistance line is the highest usual price and everything that goes up more is a selling point and you will probably not get a better price anytime soon. If the price goes beyond, it can mean that traders overbought and the probability of the price drop is very high. The support line is opposite of the resistance line, you can again look at the lowest prices for a certain period and draw them with a straight line. If the price goes below this line, it means the traders have oversold and that is the best time to buy. A trading range occurs when a security trades between consistent high and low prices for some time.
Understanding Trading Ranges
When a currency pair or stock or asset breaks through or falls below its trading range, it often means there is momentum (negative or positive) building. A breakout takes place when the price of an asset breaks above a trading range, while a breakdown occurs when the price falls below a trading range. Most often, breakouts and breakdowns are more dependable when they are accompanied by a large volume, therefore suggesting widespread participation by investors and traders. Large trending moves frequently accompany extended range-bound periods. Day forex traders frequently use the trading range of the first half-hour trading session as a reference for their intraday strategies.
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Ranges and Volatility
When the price volatility of an asset is high, the risk will also be high. Hence an asset’s trading range is an excellent indicator of relative riskiness. A prudent investor would prefer securities with smaller price fluctuations rather than those that are susceptible to momentous gyrations. Such a conservative investor may decide to invest in more stable sectors such as healthcare, utilities, and telecommunications, rather than high-beta sectors such as technology, financials, and commodities. Typically, high-beta or cyclical sectors have wider ranges than low-beta sectors.
Trading Range Strategies
Range-bound trading or range trading is a trading strategy that aims at identifying and taking advantage of stocks trading in price channels. When a major support and resistance level is found and connected with horizontal trendlines, a forex trader can buy a currency pair or asset at the lower trendline support which is at the bottom of the channel, and sell it at the upper trendline resistance which appears at the top of the channel).
Support and Resistance
If security or asset is in a strategic trading range, a forex trader can enter a buy trade the moment the price approaches its support or sell when it reaches the level of resistance. Some technical indicators such as the relative strength index (RSI), commodity channel index (CCI), and the stochastic oscillator can also assist in verifying the overbought and oversold trading conditions when price oscillates within a trading range.
For instance, when the price of a stock is trading at support and the RSI indicator simultaneously gives an oversold reading below 30, a forex trader could enter a long position (buy). Alternatively, the trader may decide to open a short position or sell a trade when the RSI gives an overbought reading above 70. To minimize risk, a stop-loss order should be placed just some pips outside of the trading range.
Breakouts and Breakdowns
Similarly, traders can enter a trade in the direction of a breakout or breakdown from a trading range. To verify the move is valid, traders can utilize other indicators, such as price action and volume. Here, there should be a considerable rise in volume on the initial breakout or breakdown with several closes outside the trading range. Traders may also decide to wait for a retracement before trading instead of chasing the price. For instance, a buy limit order could be entered just above the top of the trading range (support level) while a stop-loss order could be placed at the reverse side of the trading range in order to protect against an unsuccessful breakout.
Types of ranges
If you want to become a successful range trader, you’ll need to understand the types of ranges that support the strategy. Below are the four common types of range that you will most likely come across.
Rectangular Range: This range is common during most marketing conditions. When you come across a rectangular range, you’ll see sideways and horizontal price movements between lower support and upper resistance. An example is seen in the GBP/JPY chart below; here a rectangular range is crated setting clear parameters for possible buy opportunities.
The proof rectangular ranges are that it indicates a period of consolidation and aims at having a shorter time frame than other types of ranger thereby leading to faster trade opportunities. However, these ranges tend to mislead traders who don’t look for long-term chart patterns that may be influencing the building up of a rectangle.
Diagonal Range: these are common forex chart patterns, and numerous range traders use them. For example, the chart below shows a descending diagonal range that indicates upper and lowers trendlines to help spot a possible breakout of this range:
Here, breakouts tend to occur on the opposite side of the trending movement, which gives traders an alert in anticipating breakouts and earning a profit. While some diagonal range breakouts do take place relatively quickly, some can take months or years to build up which makes it tough for traders to decide based on when they expect a breakout to occur.
Continuation Ranges: this is a chart pattern that develops within a trend e.g. triangles, lags, wedges, and pennants. These ranges often unfold as a correction against a predominant trend. For example, the chart below indicates a triangle pattern building up amid an existing price trend and resulting in a phase of consolidation within a tight range:
These ranges can all be traded as breakouts or as ranges depending on the trader’s trading time horizon. Continuation ranges appear at any time, whether bullish or bearish.
An advantage of continuation ranges is that they can occur regularly during ongoing patterns or trends, and they frequently result in a rapid breakout, which will please traders who want to open a position and make a profit quickly. On the other hand, they take place within other trends, and hence, there is added difficulty in evaluating these trades and accounting for all of the variables present, thereby making continuation ranges a little more complicated for beginners.
Irregular Ranges: Most ranges don’t essentially present an obvious pattern or trend, especially at first glance. When this range unfolds, it often occurs around the central pivot line, and support and resistance lines crop up around it. For example, In the chart below, a diagonal pattern has taken shape in a larger rectangular range thereby creating new lines of support and resistance:
In this range, determining resistance and support areas can be a bit difficult. However, the range tends to provide opportunities for those who prefer to tackle irregular ranges by entering a trade toward the central pivot axis instead of the extremes.
These ranges can be a big trading opportunity for traders that are capable of identifying the lines of resistance that make up these ranges. However, the complexity of these ranges frequently requires traders to employ additional analysis tools to identify them and possible breakouts