Many forex traders are frustrated when currencies trade in a range, especially when it’s their favorite pair. Looking for that elusive breakout can be quite disheartening when you are all set to ride a big breakout.
However, ranges can also provide opportunities. Here are few guidelines to trading the ranges.
Sure, when a pair trades within a range, it becomes boring and the movements are slow. On the other hand, they become a bit more predictable. When a pair hits the same limit more than once, this limit may be seen once again.
It is easier to sell a currency pair when it is trading near the top of a known range. It is harder selling it when you don’t have a clue if it has peaked or not. And it works the other way around: buying near the bottom of the range provides a higher chance that the pair will rise back up within the known trading area.
Choosing the direction within the trend
In which direction should you trade the range? This depends on the long-term trend. Just zoom out and get an idea of where the pair is heading. If you are examining a range on the 15-minute chart, zoom out to the hourly or even four-hour chart. And if you focus on the hourly chart, zooming out to the daily or even weekly chart can be helpful.
If the pair is trending higher on the daily chart but stuck in range on the hourly chart, perhaps it is wiser to buy the pair at the bottom of the range rather than selling it as it hits the top of the range. And on the flip-side, if the trend is to the downside, selling the pair at the top of the range would be wiser.
But nothing lasts forever
These “buy the dips” and “sell the spikes” opportunities can work while the trend is still in play. However, sometimes these periods of range trading can mark a turnaround. An uptrend can reach its end with prolonged range trading and then turn into a downtrend. The same goes for the other way around. If the range trading lasts for too long, going with the trend can be much harder.
Entry, Stop Loss and Take Profit
- 15% off the top/bottom: Don’t go for the extremes or just don’t be greedy. The pair may not touch the very top or hit the very bottom before reverting back to the middle of the range. Trading the full range is practically impossible. A good rule of thumb may be to buy the pair 15% off the bottom of the range or sell it 15% below the top. This provides a reasonable margin of error and limits the risks. Remember: currency pairs trade more within the middle of the range than at the extremes.
- Stop Loss: Always set a stop loss, and in the case of range trading, a mirror image can work. So, a good place to place the limit would be 15% above the top of the range in case you go short or 15% below the bottom of the range in case you go long. All in all, you risk 30% of the range in your trade.
- Take Profit: We follow the same logic: 15% off the other extreme. So, if you are selling the pair 15% off the top of the range, the Take Profit point can be set at 15% off the bottom. Similarly, if you are going long, the Take Profit point can be set at 15% off the top. All in all, your reward is 70%.
This provides you with a risk-reward ratio of 70:30 or 2.33:1 or 233 pips of potential reward for a risk of 100 pips.
Some suggest a minimum risk-reward ratio of 2:1 and some textbooks look for 3:1. While the strategy suggested here does not offer an outstanding RRR, it is important to remember that it still consists of another important advantage: the trade is within the well-known range, and not a breakout, that in some cases, can be into the unknown, uncharted territories.
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