Range trading may seem like a confusing concept for many Forex traders, but it is an excellent opportunity to profit. Let’s see the reason.
Forex range trading: What is it?
It is an established fact that following the trend can generate big dividends. But currencies generally develop strong trends between 20 and 30% of the time. And the rest of the time, how do they behave? They move sideways within a narrow range between support and resistance. Although you should always be aware of the big new trends, but until they appear, you can still make a lot of money from these lateral movements in an area. And here we are going to talk about a simple strategy for such a move in the Forex market.
Why do coins get “stuck” in this area?
The reason is very simple – the volume of transactions is low and prices cannot leave your area. Of course, currency events can always develop, increasing the volume of the currency and creating the basis for a new trend, but most of the time, prices “move” in a band (range) and then there is only buy at the bottom of the band and sell at the top. This is relatively easy to do, making good profits with low risk.
Outlining the range
Setting an interval boundary is easy – all you have to do is look for support and resistance lines. These lines, to be validated, must have been tested several times (at least two tests) and from there you define this area. It is important to know that the more these limits have been tested, the stronger the resistance or support of these limits will be. Once this range is established, you simply place a buy order at support levels and a sell order at resistance levels. Let’s see how to do this, using a simple strategy.
How to make use of range trading in Forex
With the help of a chart and when prices move at their support levels, you place a purchase order without forgetting your selling trigger limit below the support line. Seems simple? It is in theory, but most Forex traders cannot make money from a swing trading system – let’s take a look at the mistakes they make and how to do it correctly.
When prices approach resistance or support levels – don’t rush into the market, you should wait for confirmation that the price is weakening in a bull market or gaining momentum in a bear market.
You can use candlestick charts to do this, but you can also use indicators that show how the dynamics of buying or selling prices behave as you approach your intervention levels and the 3 best indicators are as follows:
Technical indicators: Stochastic, Relative Strength Index (RSI) and MACD
It is recommended to combine these indicators in the “swing trading” strategy because the information provided by them tells us when is the best time to enter a position. Define the general rules for the use of moment indicators when the interval is in the following configuration:
The more the indicator shows a situation in which there is an excessive purchase or sale, the better. However, it is good to wait for some more signs of weakness in the indicator that we are using as a basis before taking a short position. Then we add the trigger limit behind the support or resistance zone. We widen this area by at least 50 pips, unlike most traders who only widen it by a few pips, if the market goes beyond this range (which is often the case) and removes limits that are very close. The market needs to breathe, so remember to set your limits at least 50 pips in range.
Once the reverse movement is made in the zone, be sure to place your closing position limit with a small margin and don’t let the price test the other end of the range. Watch out for a quick counter-trend move and to keep your profit intact, get out of your position before the market decides that this time you don’t feel like testing the other side of the range.
Trading on a Forex Range Break
It is obvious that the price of a currency does not remain indefinitely within a range and that, sooner or later, there will be a breakdown with a high volume in one direction or the other. This will herald the birth of a new trend. When that happens, you simply need to change your strategy.
Succeed in Forex with range trading
Most of the time, currencies do not leave an established area and move within the range, with no particular trend. Any Forex trader should use these moves to his advantage. As we saw above, swing trading can be simple, and with a little practice it becomes very profitable and can bring you big profits.