Talking Points:
- In the absence of a trend, trade market ranges
- First identify key levels of support & resistance
- Manage risk with a stop, in the event that price breaks
Many traders consider themselves trend traders. But
what happens when the market loses its direction? Instead of being
deterred by sideways price action, traders should develop a plan of
action for ranging markets. Today, we will review how to identify a
trading range, and an easy way to approach trading trendless markets.
Let’s get started!
Find The Range
The first task of range trading is to find the
range! This process can be easily done by connecting a series of highs
and lows with a horizontal trend line. The key is to find two points to
connect on your graph. Once found, these values can be extrapolated to
form a line of resistance and support, with the area in between defined
as our trading range.
Below we can see an example of an active range on the EURJPY.
Resistance has been formed by connecting two previous highs near
141.50. Likewise, support has been defined by connecting a series of
lows near 140.60. The distance between these two points is a respective
90 pips which the range trader will look to take advantage of as long as
support and resistance remain in place.
Learn Forex: EURJPY 30Min Trading Range
Planning an Entry
Once levels of support and resistance have been
found, traders can begin planning to enter the market. One benefit of
range trading is that traders can take a non-directional look at the
market and place both buy and sell orders. Since price is moving
sideways, orders to buy will be placed as close to our support line as
possible. If price reaches resistance, the same stance can be taken but
this time range traders will have a preference to sell the market.
Traders can set entry orders near support and
resistance, or even trade with market orders. If you have limited time
to trade, entry orders would be the preferred method of range trading.
Entry orders will remain pending until price touches the designated
level, prior to execution. Market order traders may use a system of
confirmation before entering. Confirmation signals may include
identifying a candle pattern or incorporating an oscillator signal prior to entering the market.
Learn Forex: EURJPY 30Min with Range Entries
Manage Risk
As with any trading plan, range traders need to
consider risk. The major risks associated with trading ranges, comes
from a potential breakout of support and resistance. In the event that
support breaks, any buy positions should be vacated. As well, if
resistance breaks, traders should consider the range invalidated and
exit any sell orders. This process can be handled through the use of
stop orders beneath levels of support or above key points of resistance.
Now that you are familiar with the basics of range
trading, it’s time to practice your new skills. You can get started
identifying and trading ranges with a Free Forex Demo with FXCM. This way you can develop your trading skills with the market in real time!
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