During moments of limited market volatility, an ideal opportunity presents itself to profit from the zigzag motions in the market. A range bound market is characterized by levels of higher buying pressure, known as a support, and higher selling pressure, known as a resistance. These levels create a channel, where market movement is generally concentrated within these key levels. As major support and resistance levels are defined, range traders apply the unique concept of buying at support and selling at resistance.
True range traders don't care about direction. The underlying assumption of range trading is that no matter which way the currency pair 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.
In the event a level of support or resistance breaks, traders will wish to exit any range based positions. The easiest way to do this is through the use of a stop loss above the previous high when selling the resistance zone of a range. The process can be inverted with a stop below the current low when buying support. Areas to take profit are just as easy to find when range trading. If selling a range, limit orders to take profit should be placed down near support. Likewise, when buying support, take profit orders should be placed at previously identified resistance.
Trading ranges are also called and channels and rectangles. The term channel should not be confused with “trend channel” which is when the price is moving between support and resistance (lines) but at an upward or downward angle. Traders use indicators to “time” their entries into range trades. The most commonly used range trading indicators are oscillators, including the Stochastic and Commodity Channel Index (CCI) and RSI. These indicators are useful for range trading, not only because they show when the price is near the high or low of the price range, but also provide trade signals for entries and exits.
Whether a trader wants to swing for homeruns by trying to catch strong trends with very large leverage or simply hit singles and bunts by trading a range strategy with very small lot sizes, the forex market is extraordinarily well suited for both approaches. As long as the trader remains disciplined about the inevitable losses and understands the different money-management schemes involved in each strategy, he or she will have a good chance of success in this market.