What You Should Know About Forex Range Trading?
Forex range trading is a strategy that involves buying and selling currency pairs. This occurs when they are moving within a defined price range. This means that the market isn’t trending up or down. But fluctuating between two levels of support and resistance lines.
Forex range trading can be a profitable way to trade in the forex market. This is especially for beginners who want to avoid the volatility and risk of trend-following strategies.
Let’s walk through the steps as we explain what forex range trading is, how to identify a range-bound market, and how to use price action to trade ranges effectively.
What’s Forex Range Trading?
Forex range trading assumes that prices tend to revert to their mean value over time.
This means that when prices move too far away from their average level, — they tend to bounce back and return to the equilibrium point. This creates a horizontal price movement that forms a range.
A range is defined by two horizontal lines that act as support and resistance levels. Support is the lower boundary of the range, — where buyers tend to enter the market and push prices up.
Meanwhile, resistance is the upper boundary of the range. It’s where sellers tend to enter the market and push prices down. The distance between the support and resistance levels is called the width of the range.
The main idea behind forex range trading is to buy low and sell high within the range. This means that traders look for buying opportunities near the support level and selling opportunities near the resistance level.
Traders can also use stop-loss orders and take-profit orders to manage their risk and reward ratio.
How to Identify a Range-Bound Market?
One challenge of forex range trading is to identify — when the market is in a range-bound condition. Some several indicators and tools can help traders with this task, such as:
Moving averages:
Moving averages are lines that plot the average price of a currency pair over a certain period. They can help traders identify the direction and strength of the trend.
When prices are moving above and below a moving average without a clear direction, it indicates that the market is in a range.
Bollinger Bands:
Bollinger bands are bands that surround a moving average with a certain standard deviation. They can help traders measure the volatility and deviation of prices from their mean value.
When prices are moving within the Bollinger bands without touching or crossing them, it indicates that the market is in a low-volatility range.
Relative Strength Index (RSI)
RSI stands for relative strength index, which is an oscillator that measures the momentum and strength of price movements.
It ranges from 0 to 100, with 50 being the neutral point. When RSI is oscillating between 30 and 70, it indicates that the market is in a balanced range.
How to Use Price Action to Trade Ranges Effectively?
Price action is the study of how prices behave and react in different market conditions. It involves observing and analyzing the patterns, shapes, and movements of price bars or candles on a chart.
Price action can help traders identify key levels of support and resistance, as well as potential entry and exit points for their trades.
Some of the price action techniques that can help traders trade ranges effectively are:
Pin bars:
Pin bars are candles that have a long tail or wick and a small body. They indicate a rejection or reversal of price at a certain level.
When pin bars form near the support or resistance level of a range, they signal a possible bounce or break of the level.
Inside bars:
Inside bars are candles that are completely contained within the previous candle’s high and low.
They indicate a consolidation or indecision of price at a certain level. When inside bars form near the support or resistance level of a range, they signal a possible continuation or breakout of the level.
Fakeouts:
Fake-outs are false breakouts or breakdowns of a range level. They occur when prices briefly move beyond the support or resistance level, only to reverse back into the range.
They indicate a trap or deception by the market. When fake-outs occur near the support or resistance level of a range, they signal an opportunity to trade in the opposite direction of the fake-out.
Find out more about forex range trading by opening a demo account today.