Trading ranges can be a real hurdle for novice and experienced traders alike. They are the time in which prices move sideways, oftentimes erratically, and technical signals that would otherwise result in gains falter and fizzle out. The bad news is that the market is in some kind of a range more often than not. The good news is that trading ranges can provide ample opportunities for savvy traders.
For the purposes of this discussion we will focus on two kinds of ranges and label them shorter term and longer term accordingly. What this means for you and your trading comes down to the time frame on which you trade. A shorter-term range is one in which prices may move from top to bottom or bottom to top within a few candles (less than 10). It is usually not enough for any kind of a trend to form. A longer-term range is one in which it would take at least 10 candles, usually more, and plenty of time for a trend to develop.
The longer-term range is the easier of the two to trade because there is time between bounces for prices to develop a trend and for that trend to be spotted by the indicators. On the daily chart this type of range can last anywhere from a couple of weeks to several months depending on the asset and particular market conditions. The idea is to follow the trend as it moves up toward the top or down toward the bottom of the range.
When you spot a move within a longer-term range you can switch to lower time frame to try and submit your guess. For example, the USD/JPY has been in a range on the daily for the stated period of time. It is now moving up within the range. It may be wise to confirm the trend on a lower time frame (e.g. a 4-hour chart) and determine optimal entry points using indicators.
Once you move down to the lower time frame chart it is possible to start looking for signals that either confirm or disprove the prevailing trend. In this particular case, the trend is upward and we, therefore, are looking for bullish signals. Several signals have been received including the candle, price action, MACD and stochastic.
Signals can be taken up to and until the prices reach the resistance target at the top of the range. Once this level is reached traders can expect volatility and the possibility of reversal or break through. If resistance is confirmed there is a high likelihood the bottom of the range will be revisited.
The shorter-term range is harder to trade for a number of reasons including volatility and the time between bounces, that is the time it takes prices to move from the top of the range to the bottom. In these cases, traders may look to do two things.
If the range is especially tight or expected to persist for days or weeks, then fading each touch to support or resistance is the thing to do. This means watching for times when prices reach or exceed the top and bottom of the range and then make a trade in the expectation of immediate or imminent reversal.Trade now
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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