There are different kinds of market situations. Most times, the market has a clear direction in which it is advancing. This situation of the market is often easy to trade. After all, the direction can be either up or down. A market that is moving either up or down is said to be in trend. Determining this is easy. It can even be done through a single gaze at the charts.
A trending market can either be in an uptrend or a downtrend. When a market is an uptrend, it will be making higher highs and higher lows. That is, generally, all its key points will be moving up. However, on the other hand, a market on a downtrend forms lower lows and lower highs. Hence, all the price points it will be progressively making will be moving down.
But it is not always this simple. Sometimes, the market does not have a discernable long-term trend. It is just meandering. And in those situations, it is so hard, if not impossible, to categorically say its direction. This type of market condition is called a ranging or consolidating market. It requires a special strategy to trade. This strategy is known as Range Trading.
Range Trading: What is It?
Range Trading is a strategy that seeks to identify overbought and oversold regions in the market during ranging or consolidating conditions which the trader can capitalize on to identify when to buy or sell. This strategy works best only under those conditions and so, is of limited use in trending ones.
The Range Trading strategy has a huge relevance because it makes it possible for Forex traders to trade even when the market seems impossible to predict.
Understanding the Underlying Principle
Every market, at every time, has an average price. If you understand price behavior in terms of distribution and accumulation, you will realize that the market is always moving up or down away from this price over time. However, this average price cannot be easily deduced from the charts. Doing so requires a bit of technicality. Probably, this is why its concept is not so widely used.
Nevertheless, there are some ways to go about it. If you can reduce the influence of your own subjectivity in analyzing charts, you might be able to use specific market zones, which depict the overbought and oversold regions of the market, to have an idea of the average price. This is because those zones tend to reflect the price at which much of the market activity occurs.
Another equally effective way is to use moving averages. A moving average seeks to state the average market price over a given period of time. The 5-day moving average, for example, reveals the market average price over 5 days. A 20-day moving average does the same for a 20-day period of time. A moving average line is formed when you connect moving averages.
There is always this tendency of the market to move towards the average price no matter how up or down it moves. This concept is known as the reversion to the mean. It is this exact tendency of the price that the Range Trading Strategy capitalizes upon. Because the price can always revert to its mean value, the strategy can conveniently predict its moves.
Understanding The Key Zones
As earlier stated, these key zones that the Range Trading Strategy uses to identify when the market is either oversold or overbought are known as the support and resistance levels. Without the identification and measurement of the strength of those support and resistance levels, it will be almost impossible to interpret charts.
Support and Resistance Levels.
Hence, you need to have a firm understanding of the two. A support level, for example, is found at the end of a downtrend. It signifies that more and more buyers have entered the market and overwhelmed the previously dominant selling pressure in it. As a result, it is known as a bottom. On charts, you can connect several bottoms with the aid of a horizontal line.
Conversely, for a resistance level, which is formed at the end of an uptrend, the market is indicating that sellers are beginning to overwhelm the buyers and so soon their influence will possibly cause a reversal in market price. Resistance levels are also known as tops and are also connected with horizontal lines.
Before you ascertain the support and resistance levels that you will be using in your trading, you should first ensure they have been held for a long. For example, the greater the trading volume that has occurred at either a support or a resistance level over a long period of time, the greater will be the depth of that level. And the better it can hold.
Using The Range Forex Trading Strategy
Your goal with range trading is to always seek to identify when the market is either moving up or down the average price. Therefore, you can place a buy order close to a support level where the market has been oversold. Similarly, you place a sell order close to a resistance level, a level where the market has been overbought.
Always use a stop loss when trading in a ranging market. A ranging market oscillates between range expansion and range contraction. So, it might get to a point at which the price breaks through either the upper or lower boundary of the range channel. Only your stop loss will save you from such an unexpected market move.
Finally, you have come to the end of the lesson on the Range Forex Trading Strategy. Now, you have added one more strategy to your trading tools. Nevertheless, you may still not have the time and the will to spend so much time analyzing the market yourself.
If so, 1000pipBuilder is all you need. Their high-quality forex signal service is developed using a mix of diverse Forex trading strategies that include Range Trading. Hence, you should sign up for them right away.