In the realm of day trading, various types of trading strategies come into play, each tailored to specific trading styles, timeframes, risk tolerance, investment objectives, period of trade, etc. Among these strategies, range trading stands as a prominent trading approach because it involves the strategic buying and selling of financial instruments within a narrow range.
Before embarking into the terrain of the range trading strategy, Forex traders should be fully aware of its inherent risks and limitations.
Within the intricate rhythm of market dynamics, a recurring pattern emerges – only approximately 30% of the time, markets exhibit trends, and the other 70% of the time price moves in ranges. This statistical observation poses a challenge for traders seeking to capture significant price movements or a trend. Consequently, the need arises for practical trading strategies attuned to range-bound markets.
In this Forex trading guide, you will gain a practical understanding of range-bound trading's mechanics and its potential to yield buy and sell signals even in times of market uncertainty when there is no clear trend direction either upwards or downwards. As a bonus, we’ll also share the best range trading strategy that is profitable.
What is Range Trading?
Range trading, also known as horizontal trading, materializes when a currency pair or any other asset's price movement remains constrained within defined upper and lower bounds, often referred to as resistance and support levels.
The upper boundary of the range serves as a level where price resistance is encountered, leading to potential reversals or stalls in upward momentum. Conversely, the lower boundary acts as a level of price support, hindering further downward movement as the selling pressure diminishes.
In a range trading environment, the price will bounce in between these support and resistance levels multiple times offering multiple scalping opportunities or swing trading opportunities depending on how wide the trading range is.
What Is an Example of Range Trading?
For example, if EURUSD is trading in a range between the 1.0950 resistance level and the 1.0700 support level over the next several weeks we're in range-bound trading. Forex traders engaging in range trading would likely buy EURUSD when it reaches the 1.0700 support level and then execute a sell order when it nears the 1.0950 resistance level.
Source: TradingView EURUSD Daily Chart Trading Range Strategy
This cycle is repeated until there is an expectation of a breakout from the established range.
Range Trading vs Trend Following
Unlike trend-following strategies, where traders align their positions with the overall direction of the prevailing trend, range trading involves taking both buy and sell signals at different times within the defined trading range.
In the context of a rising trend, trend-following traders would capitalize on buying opportunities during pullbacks and selling during rallies. In contrast, range traders focus on price fluctuations within the range, allowing them to benefit from both upward bounces and downward retracements.
It's worth noting that range trading can be observed across various timeframes, from short-term intraday charts like the five-minute chart to longer-term daily and monthly charts.
This adaptability underscores the flexibility of the strategy and its applicability in different market conditions.
Which Currency Is Best For Range Trading?
Range trading works in any financial market including FX currency pairs, stocks, cryptocurrencies, ETFs, etc.
When it comes to range trading in the forex market, certain currency pairs have shown a propensity for adhering to well-defined price ranges, making them suitable candidates for this trading strategy. Among these pairs are crosses like EUR/CHF, EUR/GBP, AUD/NZD, EUR/AUD, etc.
Pros and Cons of Range Trading
Advantages:
Range trading easy strategy to use by beginner traders.
Active trading strategy.
Specific price points for entering and exiting the range trade.
Works with all asset prices that have sideways price action.
Suitable for technical indicators and price action trading.
Disadvantages:
Difficult to assess when the price breaks out of its range.
High commission rates.
Volatile markets can cause a lot of stress.
Range Trading Strategies
Range trading strategies are designed to capitalize on the cyclical nature of markets, which alternate between periods of trending and non-trending behavior. The primary objective of these strategies is to identify whether a market is in a trending phase or a range-bound phase within a specific time frame of interest.
And, here is where the opening range trading strategy or the range bar trading strategy comes into play.
Opening Range Trading Strategy
This trading approach also known as the Opening Range Breakout (ORB) strategy focuses on the initial price movements that occur during a trading session, typically in the early minutes or hours of the London session or New York session.
Initially, the opening range was applied to stock prices by marking the upper and lower bands (high and low) of the first 30 minutes after the market has opened.
Traders analyze the price range established during this opening period to gauge the market's sentiment for the day. The strategy involves entering trades based on breakouts above or below the opening range, anticipating potential price momentum.
Source: TradingView GBPUSD 5-Minute Chart
Range Bar Trading Strategy
In the range bar trading strategy, Forex traders use customized bar intervals that adjust to market volatility to capture price fluctuations that occur within these predefined ranges.
The range bar charts are usually available with most trading platforms including the MetaTrader 4 platform.
Each bar is designed to encompass a predetermined price range, which adapts dynamically as market conditions change.
Source: TradingView USDJPY Range Bar Chart
Average Daily Range Trading Strategy
In forex trading, the Average Daily Range (ADR) is part of volatility indicators and it shows the average price movement, measured in pips, of a specific currency pair within a defined timeframe, usually based on daily price charts.
One of the key utilities of the ADR trading strategy lies in its ability to identify potential entry and exit points for intraday reversals.
For instance, if a currency pair's price reaches the upper boundary of its daily range, traders may interpret this as a signal for a potential reversal. Consequently, a mean reversion strategy, which capitalizes on the expectation of price retracements, can be employed.
Source: TradingView USDCAD Daily ADR
Technical analysts can also use the Average Directional Index (ADX) indicator which can be used as a range bars filter. Typically when the ADX line drops below the 20 level it signals a range-bound market.
Source: TradingView XAUUSD Daily ADX Strategy
Final Thoughts
The underlying premise of the trading range strategy is to take advantage of price oscillations within well-defined boundaries. Traders aim to buy at support levels and sell at resistance levels, optimizing opportunities presented by ranging markets.
However, it's important to note that range trading strategies come with specific challenges. False breakouts, where the price momentarily breaches the established range before reverting, require careful consideration. Additionally, the adaptable nature of these strategies means that continuous adjustments are necessary to align with evolving market conditions.
To master range trading it's crucial to have a reliable platform for executing trades. Explore our comprehensive Forex brokers comparison page by examining the offerings, features, and reputation of various brokers, you can confidently select a partner that complements your trading approach.
