Whether trading stocks, futures, options or forex, traders confront the single most important question: to trade trend or range? And they answer this question by assessing the price environment; doing so accurately greatly enhances a trader's chance of success. Trend or range are two distinct price properties requiring almost diametrically opposed mindsets and money-management techniques. Fortunately, the forex market is uniquely suited to accommodate both styles, providing trend and range traders with opportunities for profit.
Trading range-bound currency pairs is more common than trading range-bound securities, but the same principles apply in either case. The basic strategy involves finding areas of support and resistance that are well-established, and then trading against those levels until a breakout occurs. The first step in creating a range-bound trading strategy is to identify a currency pair that currently shows defined support and resistance lines. Optimal currency pairs are range-bound and slow-moving, allowing traders time to anticipate and react to support or resistance encroachments.
True range traders don't care about direction. The underlying assumption of range trading is that no matter which way the currency travels, it will most likely return back to its point of origin. In fact, range traders bet on the possibility that prices will trade through the same levels many times, and the traders' goal is to harvest those oscillations for profit over and over again. Clearly range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position.
You can also employ certain features of a range called pivot points. Pivot points are connected to price resistance and price support levels and can be calculated for a currency pair given certain pieces of information. The standard formula people use to calculate pivot points is to take the average of the high, low, and closing prices of the previous trading day. Add the high price to the low price and the closing price and divide by three.
There are various technical indicators that can help determine times of entry and exit points, yet the selection of the currency pair is still the essential and the first step in employing this strategy. Ranging strategies gives you an edge by identifying strong reversal levels, using a tight stop loss at logical locations and applying advanced trade management to bank quick profits on reversals. When you put everything together in the ranging strategy, what you get is a very sound and profitable way to trade the forex markets.