Range Trading – Frustration and Opportunities

This week’s forex trading is quite boring – most currency pairs trade in specific range. While this trade pattern isn’t exciting, it offers opportunities to run up and down the range. Could this range signal that the long-term fall of the dollar is about to change?

EUR/USD, the world’s favorite pair, is trading between 1.48 to 1.5050 in the past two weeks. It goes up, stays in a more narrow range, then goes down to trade in a more narrow range, goes up again and so on. Other pairs are also trading in similar ranges. AUD/USD traded in a perfect range three months ago. But let’s focus on EUR/USD:

EUR/USD range in the past two weeks. Click to enlarge.

All in all, EUR/USD, is bound between two parallel lines for two weeks. No year-to-date highs, no downfall to mark a change in long-term trends, no breakouts and no drama. Casey Stubbs makes this range official.

Boring? Maybe. But there’s a trading opportunity.

When currency pairs enter ranges, they become more predictable. Buying near the bottom is easier when the bottom is more visible. Selling near the top of the range is also done with less hesitance, since the top of the range isn’t hard to see.

Ranges don’t last forever. A breakout will come eventually. While the timing of the breakout is unknown, we can make an educated guess about the direction. In the case of EUR/USD, there’s a long-term uptrend channel. Up to now, this channel hasn’t been broken, so the Euro is just resting before the next move upwards.

So if you’re trading the range, it’s wiser to buy near the bottom and sell near the top than the other way around, since a breakout above 1.5050 is more likely.

But if this range trading lasts for a long time, it could move aside from the uptrend channel and break it. In this case, of range trading for a long time, the breakout from the range could be to the downside, but in such a case, it will be harder to know the direction. An attempt for an educated guess wouldn’t be too educated…

For more on this week’s event in Europe, check out the EUR/USD forecast.