What is range trading in forex?

Range Trading

Conventional trading wisdom suggests that forex markets range 70-80% of the time. With that figure in mind, you must learn what range trading is and how to trade FX markets experiencing such conditions.

This article will show you how to find ranging markets and what technical analysis tools can help you pinpoint ranges.

We’ll then move on to discuss the range trading strategies you can put in place to exploit the phenomenon, hopefully.

What is a trading range?                   

Trading ranges happen when financial securities trade between highs and lows over an extended time. The top of the trading range indicates price resistance, while the bottom reveals price support.

Price can fluctuate between the highs and lows for an extended period, sometimes for weeks or months. Some ranges can be very narrow, while others can be comparatively wide.

Trading ranges typically occur after a trending period ends. The price of a security like a forex currency pair then enters a consolidation period.

You can visualise this consolidation time as investors and traders trying to predict where the security’s price will go next. Consequently, the range period might experience less volatility and less trading volume compared to the trend that has just ended because so many take time out of the market.

Patience is the range trader’s virtue

A range period can sometimes feel as if investors are sitting on the sidelines waiting to make a decision, and it’s worth remembering that being out of the market is a position as an active trader.

If you accept the earlier claim that the FX markets range 70-80% of the time, logic suggests you’ll be watching rather than doing in this period.

It’s fair to say that many traders can trade noise during ranging periods and abandon many of the rules they’ve spent time putting in place. Traders must be patient, sit on their hands, carefully weigh up all their options, and make sure their trading conditions get met before entering the market.

Similarly, you could have a live range trade position in the market and decide to stay with it until you become convinced the move is exhausted, and this is a method which many swing traders and position traders successfully employ.

It’s important to point out how distinctive styles of traders find trends. You could have session trends, day trends or long-term position trends. For example, a swing trader could regard a specific range as noise, while a scalper sees it as an opportunity.

What does range-bound trading mean?

Range-bound trading is a strategy looking to identify and capitalise on forex pairs trading in price channels. Range-bound trading involves connecting highs and lows with trendlines to identify support and resistance areas.

After identifying significant support and resistance levels and trendlines, a trader can buy at the lower trendline support level (bottom of the channel) and sell at the upper trendline resistance level (top of the channel).

A trading range gets created when a security trades between consistent high and low prices for an extended period. The top of a security’s trading range provides resistance, and the bottom typically offers price support.

Traders try to exploit  range-bound markets by repeatedly buying at the support trendline and selling at the resistance trendline until the price breaks out from the price channel.

Historically price is more likely to bounce from these levels than break through them. The risk-to-reward ratio can be favourable and attractive, but it’s vital to remain vigilant for breakouts or breakdowns.

Traders typically place stop-loss orders above the upper and lower trendlines to reduce the risk of losses from breakouts or breakdowns, protecting the trader if the stock broke down from the support trendline.

Many traders also use forms of technical analysis in conjunction with price channels to increase their odds of success.

The RSI (relative strength index) is a valuable indicator of the trend strength within a price channel. And the ATR discussed further is also helpful.

What is the average daily range in forex?

Calculating the average daily range is critical for many trading styles, and one technical indicator excels in helping with this task.

The “Average True Range”, or “ATR”, is a technical indicator developed by J. Welles Wilder to measure price change volatility. Originally designed to trade the commodities market where volatility is more common, forex traders now widely use it.

Traders will use the ATR to figure out if the current price is ready to break out from its current range. Classed as an oscillator, the ATR is simple to monitor on your charts because it’s a single line. Low readings such as 5 indicate low volatility, high readings such as 30 suggest higher volatility.

The standard setting the designers suggested was 14, equating to 14 days. Therefore, daily charts and higher are possibly the best timeframes to deliver reliable feedback, but many traders will testify that it works very well on lower timeframes.

Candlestick bodies tend to widen during volatile periods and shorten during low volatility. If low volatility persists, traders might deduce consolidation has occurred, and a breakout is becoming more likely.

Range bound trading strategies

In this section, we’ll look at two popular methods for trading ranges: support and resistance trading and breakouts and breakdowns.

1: Support and resistance trading in a range

  • A trader might observe an FX pair starts to form a price channel.
  • After creating the initial peaks, the trader can begin placing long and short trades based on trendlines.
  • If price breaks out from either the upper trendline resistance or lower trendline support, it marks an end to the range-bound trading.
  • If a security is in a well-defined trading range, traders could buy when the price approaches the support level and selling once reaching resistance.

Technical indicators, like relative strength index (RSI), average true range (ATR) stochastic oscillator, and the commodity channel index (CCI), can combine to reveal overbought and oversold conditions as price oscillates within the trading range.

You could enter a long position when the price is trading at support, and the RSI gives an oversold reading below 30. Or you could decide to go short if the RSI reading reaches the overbought territory above 70.

2: Breakouts and breakdown range trading

  • Traders might enter breakout’s direction or the breakdown from a trading range.
  • To confirm the move is valid, traders could use indicators, such as volatility and oscillators; they could also observe the price action.
  • There should be an identifiable increase in volume on the first breakout or breakdown, and several candles close outside the trading range.
  • Traders wait for a retracement before entering a trade. A limit order placed just above the top of the trading range now acts as a support level.
  • Placing a stop-loss order at the opposite side of the trading range protects against a failed breakout.

Trading a range breakout

Trading ranges eventually end as the price breaks out, higher or lower. When this happens, the trader has a choice. They can either search for other ranging markets that are tradable, matching their method and strategy or trade the trend as price breaks out of the range.

Traders often wait for a pullback in the trend before placing the order to avoid getting caught up in false moves.

Buy or sell limit orders can be effective if placing the order to capture the bulk of the breakout movement.

If you’re looking to trade a breakout, various technical indicators can help identify whether the move will continue.

A sudden increase in volume, either higher or lower, can suggest that the change in price action and the momentum will continue.

It would be best if you exercised caution because a breakout can be false. It’s often best to analyse several candles to look for a breakout confirmation and check that the technical indicators you select confirm your decision.

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