Professional forex traders are choosing their forex strategies depending on their analysis, trading objectives, risk tolerance, and other specifications. Range trading is considered one of the trading strategies to explore as a forex trader as it involves tactically buying and selling currency pairs over a short period of time.
What is Range Trading?
Initially, range trading or trading the range is highly recommended for beginners as it only requires identifying a range with opportunities to buy and sell over a short period of time. It is one of the easiest to execute because a trader just buys when a market reaches an oversold/support level and sells during an overbought/resistance level. The range refers to a sideways market where the price bounces from support and resistance levels over some time before it breaks out.
Before you attempt to range trade, you should fully understand its risks and limitations. Make sure you have a plan that identifies your objectives and the constraints of using this strategy within the context of your overall portfolio. Here are some answers to frequently asked questions to help you get started:
Once the range is properly identified, traders usually take advantage by going long at support and short at resistance. It is advisable to further confirm interpretations by conducting additional analysis as the range alone is insufficient to support expected profitable trading actions.
Understand the Candlestick Patterns
It is highly recommended to observe reversal candlestick patterns such as Bearish or Bullish Harami and Hammer as shown in the images below:
The hammer candlestick is a popular bullish pattern that has a small body with long wicks usually two to three times longer than the body. It occurs when a trade is significantly lower than its opening but rallies to close around the opening price. This usually signals to buy and place a buy stop order above the hammer candle. The stop loss will be placed at the support level and take profit at the resistance level.
The Bearish Harami is a two-bar Japanese candlestick that suggests prices may soon reverse to the downside. Its pattern has a candlestick with a long body followed by one with a small body that is within the high and low of the previous candle. This pattern usually signals to sell and place a sell stop order slightly below the low of the first candle. The stop loss can be placed at the resistance level while taking profit at the support level.
The Bullish Harami is a candlestick chart indicator that shows a reversal in a bearish price movement generally indicated by a small increase in price. This pattern consists of a candlestick with a long body followed by a candle with a small body within the high and low of the previous candle. This pattern usually signals to buy when it forms at the support level. It is advisable to place a buy stop order slightly above the high of the first candle. The stop loss can be placed at the support level and take profit at the resistant level.
The stochastic indicator is used to identify the overbought and oversold conditions in the market, however, it can also be used to validate the reliability of formed candlestick patterns at the support and resistance levels. If a bearish reversal candlestick pattern forms above 80 levels it is considered overbought and if a bullish reversal candlestick pattern forms below 20 levels it is considered an oversold.
The range trading strategy is suited for beginners and may also be used by advanced traders, however, there are some probable risks as market unpredictability goes beyond the so-called range. It is still strongly advised to apply extra filters such as stochastic oscillators to determine unreliable signals and allow focus on those that should be emphasized.
Guide to Forex Trading Strategies
As you trade the range or you implement a range trading strategy, it is important to choose the suitable leverage, timeframe, margin requirements and set up your trading properly
When you choose the best forex trading strategy it is important to know that every strategy has its benefits and drawbacks. In contrast, the Range Trading strategy could have successful and unsuccessful times and there is no certain level of profitability to generate. As you explore the different approaches, you will need to learn technical and fundamental analysis as well as master the MT4 platform. Copying a strategy without understanding the market movements and the ability to conduct trend analysis is risky.
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