17 December, 2019 | AtoZ Markets – There are numerous articles written about techniques to apply to the trending market. But less has been written about how a trader should trade in the range-bound market condition, which typically exists in most markets more than two-thirds of the time. There are many profitable forex traders for the trending market but scare of the range-bound market. Moreover, strategies in the trending market are also risky in range-bound forex markets.
And so in this article, we will take examine how to trade in range-bound forex market, show to spot it with a trading strategy in this environment.
What is the Range-bound Forex Market?
A range-bound market is a market scenario where price bounces in between a specific low and a high price. The high price in a range market is called resistance that works as a potential reversal zone. On the other hand, the low price in a range market is called support that attracts the buyers to take buy positions. Overall, the market movement could be classified as corrective or sideways.
The range-bound forex market looks like the below-mentioned chart. The market can remain sideways for weeks and even months. Moreover, the sideways market indicates the indecision for geopolitical issues by the market participants.
There are many Banks, financial institutes, hedge funds that trade with millions of dollars. They spend a lot of money in analyzing the market. Therefore, they enter a position with a lot of confirmation and cautions. They don’t take any risk to their investment, so they wait on certain market conditions. Due to the absence of market participants, the range-bound forex market forms.
In the range-bound forex market, traders try to take their long positions as soon as the price reaches the support level and take shorts when the price reaches the resistance. Moreover, some traders wait for a breakout to establish a trending market to take their positions.
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How to Spot a Range-bound Forex Market?
The forex market remains range-bound for most of the time. Therefore, it is not easy to spot. However, traders may struggle to identify the length of the range. It is very confusing to know whether a range is going to extend or not.
There are several ways to spot the range-bound with indicators or naked chart.
ADX in Ranging Market
ADX is used to determine the range-bound forex markets which are available in both MT4 & MT5 Trading Platform.
According to this indicator, a market is said to be ranging when the ADX is below 25. Moreover, the weaker value indicates a weaker trend and stronger value, especially above 25, indicates a strong trend.
Bollinger Band in Ranging Market
Bollinger bands contract when there is less volatility in the price and expand when there is more volatility.
Thin and contracted Bollinger band indicates that the ranging market may extend. However, when bands start to expand, volatility is increasing, and more price movement in one direction is expected.
Price Action Context in Ranging Market
In the forex market, price moves towards a level with an impulsive or corrective structure. After an impulse, there is a possibility of correction. Therefore, traders can predict any upcoming corrections as well as the end of a correction.
However, a running range-bound forex market indicates an upcoming impulsive pressure in a certain direction.
How to Trade in Range-Bound Forex Markets
The main aim of range-bound trading is based on a tendency of price to reverse back to its equilibrium point. This is a straightforward theory that has been implemented in the forex market over the decades. It is based on the relation between the current price of a particular part and the average price.
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Understand the PPP Theory
There are many theories behind the currency valuation model. Of them, the Purchasing Power Parity model (PPP) as an example, suggests that the exchange rate of two currencies will be the same when their purchasing power is the same for each country.
From the perspective of the fundamental analysis, if the purchasing power of the EURO and the USD is the same, then their exchange rate will not change. In that case, the EURUSD pair will move within a range.
However, due to the trend of exchange rates being undervalued or overvalued compared to their PPP exchange rate, this model suggests selling the overvalued currency and buying undervalued currency. The trader should assume that the market rate will come back to its equilibrium exchange rate over time.
If you wish to trade range-bound with any type of analysis, you should know this concept to determine the possibilities of the price to come back to their equilibrium point.
Identify the Right Pair and Time
The first step after determining the concept is to implement a range-bound trading strategy to identify a sideways market. Applying a range-bound strategy to a trending market is an easy way to lose money. This is how retail traders blow up their accounts.
To determine a correct situation for range-bound trading follow the steps mentioned below
- Every forex pair is unique in terms of its movement. As we all know, the movement of a forex pair happens with the economic activity between the two countries. Therefore, some forex pair may trade sideways for up to a year or so, but most of the time it will have some sort of trend for the pair.
- If you open several forex pairs at a time you will the major pairs are mostly trendy. On the other hand, Minor FX pairs like EURGBP, AUDCAD, AUZNZD, and USDCHF tend to be range-bound. Therefore, it is crucial to identify the forex pair that tends to remain range-bound.
- The next thing to look at the time. There are some specific times in the forex market that keeps any pair range-bound. For example, in the market opening and closing time, prices may remain volatile and range-bound.
Find a Range-bound Market in D1
Price may remain range-bound in every time frame from 1 minute to 1 month. However, the reason behind choosing the Daily timeframe is it is more stable than the lower timeframe. Therefore it is easy to determine a better risk: reward ratios.
Moreover, price ranges are also available in smaller time frames, and some traders prefer to trade small ranges of 10 to 15 pips in the Asian session.
Setting Levels and Trading Entries
After finding a range-bound market using the daily chart, the next step is to pinpoint support and resistance levels.
In the example below the USDCHF started to move within a range-bound as indicated by the ADX indicator. Later on, it formed a support and resistance at the bottom and the top of the range.
The first buy entry came when the daily candle rejected the bears from the support level. Later, the second trading entry is from the rejection of the resistance with a daily candle. In this way, there is a possibility of 3 consecutive buying and two selling entries.
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The range-bound trading will continue as soon as the price below the 25 levels of ADX. As we can see from the above example, it takes a few months for a good range to establish on the daily chart.
Target the Mid-Point of the Range
Some Forex may like to target the other side of the range, but more than often the price will reach the midpoint of the range.
So if your profit target is the opposite side of the range you should move your stop loss at breakeven after reaching the market at 50% of the range or take some profit from that level.
We have seen that a range-bound forex market is a consolidation period where the price action experiences sideways movement. There are some facts you should know before taking any entry in the range-bound forex market
- The Range breakout occurs when the price breaks the upper or the lower level of the consolidating range.
- In a ranging market, there is no trend to trade, and we may see false breakouts and whipsawing price action.
- The price action is accompanied by low trading volumes which make the gauging market direction more difficult.
- Understand the market context to avoid unnecessary range-bound forex market.
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What do you think about trading in the range-bound forex market? Let us know in the comment section below.