Range Trading Strategy
Range trading is not reserved for the Wild West of the markets, but it is certainly beneficial when a market lacks direction. The most important key to range trading is to find support and resistance to define the range. As with any trading strategy, this technique too requires strategic management of risk in the event of a breakout. Range trading strategy is one of the most effective trading strategies associated with Forex trading. In the absence of a trend, or a direction in the markets. you too can carve your own path to prosperity using range trading strategy. Let’s learn more about this innovative range trading strategy.
Range Trading Strategies:
Step 1: Find Your Range
The first step of range trading strategy is to find the range. Forces of supply and demand can impact prices in the forex market and this is where support and resistance enter the equation. Helping traders locate levels in which a supply and/or demand in a given currency pair may transform once lines have been crossed. Supply is the amount available at a certain price, while demand is the amount required or wanted at a specific price. Prices of a product or instrument can have a massive impact on the amount demanded by the marketplace or the supply that one can get. When price increases, seller’s willingness to offload the product will also rise, illustrated by the supply curve which shows how additional units become available as prices increase.
On the other side of the divide, buyers will demand more at prices which are lower and as price rises, demand falls as can be seen in the demand curve below:
Supply and demand play out through support and resistance. Support is the point at which demand begins to outstrip supply causing prices to shoot higher. Resistance is the opposite. Breakouts hold that prediction of the stimuli causing price change may be difficult to forecast.
Traders need to be clear whether the trading environment will stay the same or change, influencing whether you trade for a range or a breakout.
Trading the Range: Status Quo
When trading a range, traders are holding that the environment will remain the same with support or resistance staying at certain levels. Price can be used to define points in the market when demand outstrips supply creating increased prices or vice versa. If breaks of support or resistance work to create new highs or lows, the aim of the trader ranges from range-bound condition to sell back at a higher price or buy back at a lower price depending upon the nature of the breakout.
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Finding the range involves using zones. Zones can be created through a series of short-term highs and lows and connecting these through horizontal lines. An overhead range is a resistance while support is the area where price helps up by traders looking to make the big buy.
Step 2: Timing the Entry
Traders can time range trading entries through numerous methods.
Oscillators: Some of the most popular oscillators include RSI, CCI and Stochastic’s. These technical indicators serve to track prices that calculate how far the indicator is fluctuating along the center line. Indicators turn extreme as price reaches a zone of support or resistance.
Step 3: Managing the Risk
The final part of a successful range trading strategy is risk management. When a level of support or resistance breaks ( as it will), traders have to exit range based positions through the use of stop loss above the earlier high, when making a sale within the resistance zone of the range. The process can also be inverted with a stop below the current low while purchasing support.
Sniffing out the profits in range trading is equally simple. In selling a range, orders should be limited to take profit down near support. When purchasing support, profit orders should be placed at earlier identified resistance.
Tricks of the Trade: Range Trading Strategy
Traders can get the best results by using the range trading strategy most suitable for current market conditions. Ranges are a result of price getting caught between support and resistance. Remember that ranges are difficult to trade and traders will eschew ranges to trade in trending or breakout situations. Trends can be grabbed on to, and breakouts offer a wonderful chance to break even in the markets, but ranges are another kettle of fish altogether. To catch the range, prices have to get caught between support and resistance. When this occurs, traders can address the range in 1 of 2 ways and trade for the range to continue which means the upside is limited or looking for the breakout from the range in the face of a new trend.
Trading Ranges or Looking for Breakouts: The Trade-Off
Traders often ignore ranges as they perceive the profit potential to be restricted. If a range is being traded through buying support, then traders are nearing the position of resistance. This is a limited upside type of proposition. Of course, this does not have the lure of a trend or breakout where traders can get on the right side and risk up to 3 to 4 times their capital.
The reality of trading is that the range is the market condition likely to be encountered almost all the time.
In the Middle of a Ranging Storm?
Ranges can develop in multiple ways. Short term range is towards the start of an uptrend as buyers and sellers fight to fend off and gain control over the coming trend. Another situation where the range may result is when a long bout of indecision leads to congested price movements that stay restricted between support and resistance levels. Regardless of what the context may be, if prices are bound between resistance and support, then a range-bound period is taking place in the markets.
If traders are going to engage in range trading, they have to be clear that risk management is taking place properly as breakout moving in the opposite direction of the trader’s position can lead to massive losses that come about when the breakout turns into trend pushing traders against the equity line. Trading ranges are only possible when a breakout against the trader’s position stops.
The goal behind range trading strategy is simple. It is the same as when you are trading trends – the aim is to buy low and sell high. Another requirement for range trading is that price action must be bound between resistance and support. If previously established support and resistance remain respected, a profitable position may be visible to the trader.
A difficult aspect of this is prices will often not here to exact identical price as support or resistance. Zones around supportive as well as resistant prices are way more applicable. Price action analysis has many benefits for the trader. Benefits of strong reeds can be obvious, but what is equally apparent is that the market will not trend forever. Markets may struggle to find a defined direction. Identifying support and resistance through price action is the basic aim. Traders can identify inflection points in the market based on where the price has previously traded. The benefit of this can be tremendous. While past prices cannot be future projections, they can provide a clue about the stance of swing highs and lows of the market. Markets often swing in a bid to find the perfect intrinsic value. Longer time frames are easier to trade ranges because you can get a bird’s eye view of the market and secure advantages from a vantage point.
Once you identify the prices at which buying and selling will take place and when trading will stop, the decision to enter the trade can then be taken. Seeking risk to reward ratios of 1 to 1 or higher is the way out according to specialists in forex trading. This ensures that prospective profit equals potential loss.
Zones of support and resistance can ensure range bound conditions are more feasible. Additional elements of support or resistance in the range includes pivot points, psychological whole numbers and more. Once traders have seen a price action swing around a certain price validating the level of the price as one which markets have breached and may do so once again, range trading can be taken a step further.
Bear in mind that just as no trend is permanent, similarly no range will last forever Traders can use information for benefits while trading ranges. If a trader guys support anticipating the continuation of range and the opposite happens, traders need to take a second look. If the breakout is not real and the range fills as the trader has anticipated, it could also rain away profits of trade runs to the stop. This is not the right way to handle a range. Some position management is needed in the event that breakout could happen. Traders need to close a portion of the position for prices to reverse and remaining part of that position can reap rewards if a breakout does, in fact, break out. Scaling out of the trade is a similar step. If the breakout happens to turn into a fresh trend, the trader can step into a world of rising profits if the trend should continue. What traders need to look out for is that they should adjust their stops to breakeven, so even if breakouts don’t equal fresh trends, the remainder of the position can be taken out at what is the original entry price.
Trading Range-Bound Currencies:
This is more common than trading in range bound securities but exactly the same principles apply in both cases. The fundamental strategy involves finding support and resistance zones that are closely established and trading at these levels until the breakout inevitably occurs. An abundance of information on its exchanges makes the US dollar a better choice for Forex traders. But regardless of the currency pair, the first step to create a range bound trading stratagem is to assess defined lines of support and resistance. Optimal currency pairs are not quickly moving, allowing traders to react to either of the 2-support or resistance. Traders can enter just long before the support price and place a stop just beyond this. Entering short prior to the resistance boundary works in the opposite way.
Currently, there is not much of scope as far as distance between higher and lower boundaries are concerned. This leads to limited upside potential so entries and exits need to be set up quickly. Range trading is not about direction, it is all about identifying overbought and sold conditions within the range boundaries. From interest rates to government policies to those of the central bank, engaging in fundamental analysis forms the basis of successful range trading. So, even if you prefer technical analysis, fundamental analysis is the way to go if you want to engage in range trading.
Range trading strategy is all about placing the bets when you know the outcome courtesy of the price action. Finding out the support and resistance zones is the key to a successful range trading strategy. Learning how to counter breakouts and catch the trend or buck it when the need arises is important. This forms the essence of successful range trading. Currency trading is a tough proposition for beginners but what counts is the perseverance and use of logic. Range trading emphasizes the most important aspect of trading- sticking to the golden mean or close to it, at any rate.
It is more possible that markets will trend for some time and stay within the range for others; after all, everything that goes up must come down and markets seldom defy the law of gravity, given the complex factors that influence their movement. Range trading is the perfect way to add to profits and cut down on losses. The skill of a range trader grows with time and experience; the longer the period for which trading is taking place, the more skill a trader acquires. Though short-term range trading strategy is not uncommon, long-term range trading strategy yields benefits and profits within a span of time and provides rich dividends.
This has been a guide to the range trading strategy. Here are some articles that will help you to get more detail about the Currency Trading so just go through the link.