Forex Range trading is a type of strategy used in trading to find the entry and exit points of a market. In other words, it refers to finding a range in a market that constantly trades between two lines of support and resistance.
Drawing trend lines between highs and lows is one of the common techniques to find if a market is range-bound or trending. The mark if a market is trending is by if there are continually higher highs or lower lows, and that the trend lines slope up or down.
The presence of a range-bound market is when the trendlines become flatter and the high levels are of similar levels and so are the low levels.
In the case of wanting a longer position, you have to enter the market near the level of support and exit near the known level of resistance. In the case of a short position, it will be the opposite.
Insight of Trading Range
With the falling or stock breaking through below its trading range, it indicates that there is either positive or negative momentum building. In the case of the rise of the security price above the trading range, it means it is a breakout moment. Meanwhile, when the price falls below the trading range it is the moment of breakdown.
Accompanied by the large volume which has widespread participation by traders and investors, the breakouts and breakdowns are more reliable.
Looking at the duration of the trading range is one of the things that many traders get invested in. Usually, day traders use the trading range of the first half-hour of the trading session which they use as a reference point for their intraday strategies. For example, a trader might buy a stock if it breaks above its opening trading range.
Types of Range Trading Strategies
Range-bound trading is a forex trading strategy that seeks to identify and capitalize on stocks trading in price channels. A trader can buy a security at the lower trendline support and sell it at the upper trendline resistance, after finding the major support and resistance levels.
There are two main strategies:
- Support and Resistance
- Breakouts and Breakdowns
1. Support and Resistance
In the case of a security being in a well-established trading range, the traders can buy and sell the price when it approaches support and resistance respectively. Technical indicators, such as the relative strength index, and the commodity channel index, can be used to confirm overbought and oversold conditions when price swings within a forex range trading.
2. Breakouts and Breakdowns
The trading range is one aspect from where the traders can enter the direction of breakouts and breakdowns. Volume and action plans are considered to be the move to make it prove in that direction.
There should be an increase in the volume on the initial breakout or breakdown. Instead of chasing the price, traders may want to wait for a retracement before entering a trade. A stop-loss order could sit at the opposite side of the trading range to protect against a failed breakout.
Use of Stop Losses in Range Trading in Forex?
Correct risk management is the most crucial part of any type of trading. It is the principle of range trading in forex that sees the prices hit the zone of support and resistance. Therefore, the prices will not exactly respect these areas; trading ranges attract many traders, and due to this the volatility may increase. Prices will therefore swing around these points, and the traders will look to use wider stops around these points.
Looking at the width of the trading range and the distance to be employed in stop placement is considered important while trading ranges. In the scenario of range being too tight the stops at the required distance may not create the risk-reward ratio, which has to be at least 2:1.
Why is Forex Range Trading so popular?
Due to moving and trending in a single and strong direction in a small fraction of time, the forex range trading strategies became popular. With range being a place of most activities, it became an essential skill to find various opportunities in any price action.
The traders who practice short-term styles like scalping and day trading are more likely to use range trading in forex. That’s because of the focused quick positions in the movement, rather than a long-term trend.
Lastly, It’s also a common strategy for forex traders, who look to take advantage of the small and fast price changes.
Conclusion
Having the skill to do range trading in forex is useful because markets don’t always trend. Mostly, the market trends are uncommon. Range trading can let the traders capitalize on non-trending markets. It’s not a realistic thing when a trader tries to predict when the range starts or ends. Sometimes patience is the right key, so the traders should avoid anticipating in the market and wait till the range is completely established.