Range-bound trading is especially suited for trading the forex markets.
It is often a favorite of forex traders who take shorter-term positions. To understand why, though, we have to take a closer look at the underlying traits that move currencies, and what separates them from other securities in price action.
Most developed countries have fairly stable economies and currencies. Underlying economic conditions tend to spread through most major countries, since they are all highly interdependent through global trade.
What this means is that, generally, the price of their currencies varies a little, and it will tend to move back into certain ranges.
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If a particular currency loses or gains too much with regard to other currencies, the central bank will often intervene to get it back in line since it could have negative effects on the economy.
Sideways is Good
Range-bound forex trading is when a currency pair moves up and down between two levels.
Ranges are much more common in longer-term charts than in short term ones. They are formed by strong resistance and support levels. These are often around a technical trigger level, such as a Fibonacci retracement.
They can also be set by central banks wanting to keep their currency trading within a certain range. Banks will, therefore, enter the market to buy or sell a currency to maintain stability.
This consistent up and down with an established range provides a great opportunity for range forex traders to buy low, sell high, and repeat.
A range is different from a trend. A range continues to move horizontally, while a trend goes up or down. Some of the trend forex trading techniques work for range trading, but there are other tools that are better suited.
Knowing Where Things Are
To become a good range forex trader, you first have to be able to identify when a range has been established. You also have to know when it’s likely to be over.
The first way is to get really good at identifying support and resistance levels. This can be through technical as well as fundamental analysis.
Of the indicators, one of the popular ones is the ADX (Average Directional Index).
When it drops below 25, that indicates “sideways trend” (range-bound) has likely formed. Then you can trace the bottom and top levels to identify where to enter your trades.
Tracking the Market
If you want to trace the top and bottom with a little math, Bollinger Bands are useful to show where the market is trading. If the bands are moving horizontally, that’s an indication of range-bound trading, as well.
Nothing lasts forever! Eventually, the range will either breakdown, or the market will breakout. You can use the same tools to identify a trend in reverse to identify when it’s over and adjust your trading accordingly.
Locking in Price Moves
Range forex traders (or rangers) usually put their stop losses just beyond where they identify the bounce points of the range. This protects them from breakouts.
In order to not get stopped out prematurely, it’s really useful to get familiar with support and resistance levels to price your take profits and stop losses properly.
In general, oscillators are the best indicators for this type of forex trading, such as Parabolic SAR and RSI. The latter is probably the most popular, and helps identify the turning point as the FX market approaches and bounces off the ends of the range.
Higher volatility, exotic currencies are usually not suited for range forex trading. Crosses (ones that don’t have the USD as a counterpart) are usually more likely to get range-bound.
Currencies that have a lot in common and move in tandem are the best. Probably the best examples are the EUR/CHF and AUD/NZD.