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Range Trading: A Simple Forex Strategy Explained

    

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Naturally, all traders are looking for the next technique that can help them achieve trading objectives. As range trading becomes a popular approach to the market, more people are looking towards it as a means to take advantage of what the forex market has to offer. That being said, for some people the idea of range trading, or even the term itself, is alien, but that is about to change. The following breaks down range trading, explaining what stands behind the strategy and how you can go about implementing it.

What Is Range Trading?

Range trading—officially speaking—is a forex trading strategy that involves the identification of overbought and oversold currency (also known as areas of support and resistance) and buying during oversold/support periods and selling during overbought resistance periods. Range trading can generally be implemented at any time, but it proves to be most effective when the forex market lacks direction with no discernible long-term trend in sight. On the other hand, range trading proves to be at its weakest during a trending market, especially if market directional bias isn’t accounted for. 2017 happened to be a great year for range traders due to mostly sideways trending currency markets.

Types of Range

Should you want to become a successful range trader, you’ll need to have a firm grasp on the types of range that stand behind the strategy. To help you get an additional grasp on what’s what when you are casting your eye over the charts, here are the four most common types of range that you’re likely to come across.

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Rectangular Range

When you encounter a rectangular range, you’ll see sideways and horizontal price movements between a lower support and upper resistance. This is common during most market conditions, but not quite as common as continuation ranges or channel ranges. Even without indicators, it should be easy enough to spot horizontal ranges on a chart, as they typically show clear support and resistance zones, a flattening of the moving average lines, and highs and lows lying within a horizontal band.

Diagonal Range

Diagonal ranges in the form of price channels are common forex chart patterns and something that range traders will look to take a vested interest in. With this kind of range, the price descends or ascends via a sloping trend channel. This channel can be rectangular, broadening, or narrowing.

Continuation Ranges

A continuation range is a chart pattern that unfolds within a trend. Triangles, wedges, flags, and pennants all qualify, with these ranges usually occurring as a correction against a predominant trend. These can all be traded as ranges or as breakouts, dependent on your trading time horizon. Bearish or bullish, continuation ranges can realistically occur at any time.

Irregular Ranges

Most ranges don’t necessarily present an obvious pattern, at least not at first glance. When a particularly irregular range unfolds, it’ll tend to take place around a central pivot line, as resistance and support lines crop up around it. During an irregular range, determining support and resistance areas can prove to be difficult, but it will present opportunities for those who like to tackle irregular ranges by trading towards the central pivot axis rather than at the extremes.

The Strategy Behind Range Trading

Range trading is something that plenty of active traders look to pursue. Those looking to join the crowd will need to understand not just the types of range you’ll face, but also the strategy behind using these ranges to full effect.

Identify the Range

To start off on the right foot, you’ll need to identify the trading range. This can be located after a currency has recovered from a support area—ideally at least twice—while it should also have retreated from a resistance area—once again at least twice. That being said, it is not a requirement for these highs and lows to be similar in every way, but they should at least be close together. Some traders have a tendency to hold back until more than two highs and lows have occurred; however, this is a case of personal preference. After these highs and lows have occurred and subsequently been pinpointed, a straight line can link them on a chart, thus creating the currency trading range.

Setting Up Your Entry

With a trading range in your crosshairs, you’ll need to set up your entry, which will come about through buying near support levels and selling orders near resistance levels. To help with this, some use indicators (see oscillators such as the relative strength index and commodity channel index) as a means to place trades. Correctly using indicators should allow any trader to exhibit tighter control when setting up an entry, usually by obtaining a better sense of when to enter or exit a position.

Manage Risk

With your range identified and your entry setup, you must not forget the final part of any effective range-trading attempt. Risk management is always a crucial factor no matter how you choose to trade, but it does carry much more importance when you choose to range trade. Should a resistance or support level break, traders will rightfully want to walk away from a range-based position. Having a stop loss in effect can easily help when it comes to ensuring that range-trading is risk-averse. Placing a stop loss above a previous high when selling the resistance zone of a range is often advised, while you can freely invert the process when buying support. Remember, when you’re range trading, your efforts will be most effective when appropriate risk management is in place.

Conclusion

Range trading doesn’t embrace the Wild West side of forex like other trading strategies, with it actually being on the tame side. This has brought about criticism that it is too simplistic for modern market conditions, but in spite of this its relevance and popularity have never wavered. At its peak, range trading can become impactful during times where the forex market lacks a definitive direction. By identifying the range, timing your entry, controlling your risk exposure, and—most importantly—understanding the fundamentals of range trading, you can make some serious money by trading range effectively.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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