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Forex Range Trading

While Forex trend following can yield big profits, currencies only offer strong trends 20 – 30% of the time and the rest of the time currencies will move sideways within narrow ranges of support and resistance. While we believe you should always be on the lookout for currency trends, you can make a lot of money from Forex range trading, while you wait for the big trends to emerge. Lets look at how to range trade with a simple FX reading strategy.

Why Currencies Trade in Ranges

The reason why currencies trade in ranges is simple – there is neither a lot of buying or selling and prices are in a range. Of course factors will always come into play to see Forex trends emerge but a lot of the time they will trade sideways and you can buy into the bottom of the range or sell into the top and look to make good profits with low risk

Establishing the Range

Establishing a trading range is easy – all you need to do is to look for support and resistance lines which have been tested a few times ( at least two tests) and these establish the range. The more times the range has been tested, the more valid support and resistance will be. When you have established the range of the currency pair you need to trade it and this means selling into resistance or buying into support. Let's look at how to do this, with a simple Forex swing trading strategy for profit.

How to Trade Ranges

When prices move to support or resistance you want to sell or buy into the level and put your stop behind the resistance or support level on your chart you are trading into. Sounds simple? It is in theory but most traders cant make money with a swing trading system – so lets look at the errors they make and how to do it correctly.

When prices run up to resistance or down to support – don't just jump in the market you need to wait for confirmation that the price is losing momentum in a bull market or is gaining momentum in a bear market.

To do this you can use candlestick chart formations but personally I prefer to use some momentum indicators which will tell you how overbought or oversold momentum is coming into the level you are watching and the 3 best indicators in my view are:

The Stochastic, the Relative strength Index ( RSI) and the MACD.

I like to combine these indicators together in my swing trading strategy and let them tell me when to enter the market and my general rules of use of momentum indicators when trading ranges are:

The more overbought or oversold the indicator is the better and I will normally wait for some signs of weakness in the indicators/ indicator I am using before getting short. I then look to place my stop behind support or resistance but NOT by a few pips like most traders. I will use at least 50, this is just in case, the market moves above support or below resistance (which it does frequently) to pick off stops. Don't let this happen to you; if you place your stops to close in range trading, you will lose so – make sure you give the market room to breathe.

Once the reversal has occurred make sure you set a target and don't let prices test the other side of the range – bank early. If you let the test occur, you could be subject to a rapid counter trend movement so, get out before the test occurs and you will keep more of your profit intact.

Trading a Break from the Range

Of course all ranges eventually end and a clear break of support or resistance with high volatility present many mean the range is finished and a new trend following phase has begun. When this occurs you simply switch to a trend following strategy which we have looked at in other sections of this site.

A Range Trading FX Strategy for Success

because currencies will move in channels and range trade much of the time any Forex trader should consider a Forex trading system to trade these ranges. As we have seen above Forex swing trading can be simple but with a little practice, it can also be very profitable and lead you to long term Forex trading success.