Forex and Range Trading

We quoted yesterday a statistic that tells us that FX pairs are in a non trending state nearly 65% of the time. That's a lot of range bound pairs. In order to make those periods profitable, a number of traders have tried various schemes of "range trading". What that means is identifying a range, then selling its' tops and buying it's bottoms. When they flash up their charts,you see price action that rolls up and down and looks as reliable as the ocean tides. Even a monkey could profit from this! But let's not jump the gun. Range trading can make you money, but spending the majority of your time looking for ranges and trading potential ones will cost you financially and emotionally. I rarely recommend range trades in the service, and here's why. Although pairs may be range bound for the majority of the time, the ranges do not remain the same. So the challenge is to be able to quickly identify a range, so that you still have time to take advantage of it. After all, if you start trading a range after it has made 3 similar tops and three similar bottoms, you will likely get burned as it will soon abandon those parameters. I find it best to look for particular set-ups that produce ranges, rather than looking for ranges themselves. This weeks action in the sterling has proven to be a good example.

The sterling had been in a multi month downtrend. It hit an extreme price and began to rise. Demonstrating a bullish determination, it broke through daily weekly and fibonacci barriers. But then it got stopped at a major fib retracement...the 68.2. It may have been the technical barrier that halted the advance, but when we calculate in the other factors of the week, we get additional framing for our picture. There's big news coming out this week, a rate announcement. Also we have new Monetary Policy Committee members who want to weigh in and could divide the decisions. Also we have the non farm payrolls due out at the end of the week. All those items working together, can produce something of a stalemate in a currency pair which is what produces the "range". So bumping against a major fib, after several days of one way price action, but having to wait for significant data, these together produce ranges. One should then look for three points to begin trading. In this case the first point would be a swing high, followed by a swing low (point 2) to establish a lower support, then look to sell if the pair has trouble upon reaching the previous swing high. Generally, if I like the set-up, I'll try to get a good sell entry, and aim for a 2/3 drop in the range then exit with a profit. If the pair struggles at the lower end of the range, I'll look for a decent entry and try to get 2/3 on the way up. never shoot for the whole range. It will always disappoint you.

Happy Trading!
Bill
bill@thefxtradingmasters.com
www.thefxtradingmasters.com