Hello Forex Traders,
Our topic for today is range trading and it belongs to a series of articles where trends ad reversal are discussed. To read more about that information, please take a look at these links:
1) Trend part 1
2) Trend part 2
Range trading is in fact the opposite of trend trading: there is no trend. Ranges are primarily characterized and recognized by the lack of a trend. Traders are therefore always trading a range, trend or reversal, even if they might not recognize it as such. But it is the basic underlying premise of the Forex and can explain all movements with the market.
A trend is in place when price is making higher highs and higher lows (uptrend) or lower lows and lower highers (downtrend).
A range is in place when price is not making those consecutive highs and lows. A range could see the following:
1) Lower highs and higher lows à contracting wedges, triangles
2) Equal tops and equal bottoms à flat corrections
3) Higher highs and lower lows à expanding wedges, triangles
A range is usually a type of a chart pattern and chart patterns are great methods of identifying ranges.
MULTIPLE TIME FRAMES
As with defining the trend multiple time frame analysis is important because a range formation on 1 time frame could imply be a (small) pause or consolidation on a higher time frame within a trend.
For example: a 4 hour uptrend with higher highs and higher lows sees 2 days worth of candles (12) not breaking the highs or lows. This 2 day sideways movement will look like a range on a 15 min chart. Or a range on a 4 hour chart might very well be a sideways consolidation zone within a trend on the weekly chart.
By checking multiple time frames a trader can understand the story and entire structure each currency is in.
MOST VITAL INFO
One of the most important tasks for traders is to identify the market type correctly and then to trade or not trade accordingly. What I mean with that is the following:
1) all trend traders should avoid range markets
2) all range traders should avoid trend markets
3) all with the trend traders should avoid ranges and reversals
4) all reversal traders should avoid ranges and with the trend markets
It is of utmost importance for any trader to correctly identify what type of market the currency is in. Failure to do so could lead to a Forex trader implementing a with the trend strategy in a ranging market and that strategy would then fail, quickly. Therefore being able to recognize what environment the currency pair is in, could be one of the most vital pillars for becoming profitable.
Of course, there is nothing wrong with trading multiple strategies geared towards 2 or all 3 market environments. However, in our trading room we focus on with the trend market structures. The reason why is because I do highly recommend to first achieve profitability by trading 1 market environment before trading multiple ones. Always start with mastering with the trend setups before trading other formations, as with the trend trading can be mastered sooner than the other 2. Read more about these items here:
CHANGE OF STRUCTURE
The change of a structure is the prime cause of losing trades. In most cases it is difficult to identify the switch of environments, primarily because interpreting different time frames does require experience, but also because there is always a lag before the switch can be confirmed. A good tip to avoid being caught by surprise is to treat every support and resistance (S & R) as critical. In most cases the S&R 1 and/or 2 time frames higher is crucial. A failure to break a support or resistance is the very first step of a range, yet is certainly not the confirmation or a prediction of such a future formation. If a traders aims their take profit at the next support or resistance, then the chances of getting stuck in a with the trend trade while the markets falls into a range is avoided. This is what called a conservative target. Let us run through all of the scenarios:
1) A trend stops and reverts into a range: a failure to recognize the new environment could mean that the Forex trader keeps implementing the with the trend strategy in a range market. The incapability of a currency pair to post a higher high and lower low is the first warning signal (including double bottom or tops), but a trend is definitely still in play. The confirmation is the incapability of price to break through the 2nd time around. In Elliott Waves terms that is explained by the ABC correction. One failure to break a high or low is logically due to the natural waves and corrections. However, after such a correction the currency is then ripe for a continuation. Failure means a range.
The thorniest part of trading reversals is not only predicting where a trend will stop but above all, whether the next structure will be a range or reversal.
2) A range stops and reverts into a trend: this is what break-out traders are looking to trade and is easier to spot than the first example here above. When the currency is a range and then price breaks through a vital support or resistance, it is in fact breaking out of that range. The break-out could in theory be a reversal or a with the trend break-out. Obviously a break-out with the trend is in most cases the safest. It is important of course to avoid false break-outs. These are moments when the currency pushes through the support or resistance but fails to find continuation and follow through after breaking out. In our trading room we use several “tips and tricks” to avoid false break outs. These methods are using price action signals, time factor, and the structure market analysis increase our odds of success in determining the break-out success. Join our trading room to know all of the exact details.
That wraps today’s article. I hope you enjoyed it and learned something new. Was there any particular part that you found most valuable for your own trading? Please let us know down below!
Next week we could continue with an article on how to trade ranges in Forex. Would you be interested in reading about this topic?
Wish you Good Trading in the last trading day of September and I am already looking forward to the new month of trading in October.
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