Range Trading

Range trading is a Forex trading strategy that involves identifying overbought and oversold currencies. Range traders buy during oversold/support periods and sell during overbought resistance periods. Range trading can be done at any time, but is most effective when the Forex market lacks direction and no clear long-term trend is visible. Range trading is at its weakest in trending markets, especially when market direction bias is not taken into account. With currency markets mostly trading sideways, 2017 was a great year for range traders. 

Types of Range Trading

Rectangular Interval

When you encounter a rectangular range, you will see sideways and horizontal price action between lower support and upper resistance levels. This is common in most market conditions, but not as common as continuation ranges or channel ranges.

Diagonal Interval

Diagonal ranges in the form of price channels are common Forex chart patterns that are of interest to many range traders. Within the diagonal range, price moves down or up through a sloping trend channel. The channel can be rectangular, widened or narrowed.

Continuation Interval

A continuation range is a chart pattern that unfolds within a trend. Triangles, wedges, flags, and pennants all qualify, and these ranges often occur as corrections to the dominant trend. Continuation ranges can all be traded as ranges or breakouts, depending on your trading time frame. Bearish or bullish, continuation ranges can actually occur at any time.

Irregular Intervals

Most intervals don't necessarily exhibit obvious patterns—at least, not at first glance. When a particularly irregular range unfolds, it tends to occur around a central pivot line, around which lines of resistance and support emerge. Within irregular ranges, identifying areas of support and resistance can be difficult, but this will provide opportunities for those who prefer to address irregular ranges by trading toward the center pivot rather than the extremes.

How to Range Trade?

1. Determine the Trading Range

To start on the right foot, you need to identify your trading range. This can be found after the currency recovers from the support area. The currency should also retreat from the resistance area. There is no requirement that these highs and lows be similar in every way, but they should at least be close together. Some traders prefer to hold back until there are more than two highs and lows, but this is a matter of personal preference. After these highs and lows occur and are subsequently pinpointed, a straight line can connect them on the chart, creating a currency trading range.

2. Set Entry Point

After you have a trading range in your crosshairs, you need to set your entry point. You do this by placing buy orders near support and sell orders near resistance. To do this, some people use indicators such as oscillators such as the Relative Strength Index and the Commodity Channel Index as a means of placing trades. Proper use of indicators should allow any trader to exhibit tighter control when setting up entries, usually by having a better understanding of when to enter or exit a position.

3. Manage Risk

After determining your range and setting up your entries, you must not forget the final part of any effective range trade – risk management. No matter how you choose to trade, risk management is always a key factor, but it is even more important when you choose to range trade. If a resistance or support level is broken, traders would rightly want to get out of a range-based position. Effective stops help ensure that range trading is risk-averse. It is generally recommended to place your stop loss above the previous high when selling range resistance, while you are free to reverse the process when buying support. Remember, when you range trade, your efforts will be most effective when proper risk management is in place.

Pros and Cons of Range Trading

Pros

Easy to Use

Range markets have stable, predictable price action where you buy at support levels and sell at resistance levels. There are also clear guidelines for stop loss and profit placement.

Quick Turnaround

In a wide range of markets, the turnaround time for transactions is fast. The price oscillates between support and resistance levels in the short term. This makes this strategy suitable for short-term traders who do not wish to expose their funds to the market for an extended period of time.

Available for All Markets

All markets tend to have periods of price volatility. Whether it is forex, stocks, commodities, indices or cryptocurrencies, range trading strategies can be applied to sideways trends in the underlying market.

Cons

Limited Profits

Range trading can limit your profits in any single trend. The take profit is placed quite close to the entry price, which results in a lower yield. Additionally, as prices move back and forth in range-bound markets, traders are forced to make multiple trades to maximize profits. But this results in additional transaction fees, which limits profits.

Accurate Positioning Requirements for Entry and Exit

Successful range trading requires traders to pinpoint optimal price entry and exit points. Support and resistance areas are typically areas rather than specific price points, and it can be difficult to determine the best entry and exit prices that provide reasonable risk/reward recommendations.

Breakthrough Risk

This is the biggest risk when trading ranges. Price is never stuck in a range forever, it breaks out of that range. Breakouts are often strong and can result in severe capital losses for range traders, especially if they do not use stops.