What is a Forex Range Trading Strategy?
Forex range trading strategies are when a forex trader will look to buy or sell currency pairs when price is stuck within a range. They would look to buy at the bottom of a range and sell at the top of the range. Some traders would exclusively trade ranging markets whereas other would combine a forex range strategy with a forex trend trading strategy and forex breakout strategy, depending on the current market conditions.
The consolidation of price within a range can occur over the short, mid or long-term. Whilst the longer a range holds for the more significant it can be, one must be wary that price could breakout from the range at any time. You can look for ranging prices on any chart time frame from the 1-minute through to the 1-hour, 1-week, 1-day and even monthly charts. This makes range trading suitable for day trading and swing trading strategies.
The forex market can be analyzed for ranges by using technical indicators such as Bollinger bands and moving average envelopes. Usually, if price is within the upper and lower values of these indicators and they are flat, this would be considered a ranging market.
Drawing support and resistance levels on your charts with horizontal lines can also help to easily identify ranging market conditions. If price stays within these levels for a sustained period of time, this would be considered a range.
Traders can pick off trades within a range using additional analysis such as technical indicators such as the CCI and Stochastics to spot overbought/oversold areas either side of the range and price action analysis for confirmation. It would always be beneficial to be aware of economic news releases as these can cause volatility which leads to a breakout from a range.
Forex range trading strategies usually look to hold trade position until the opposite side of a range is reached. However, there is no one size fits all and thus, some traders may lock the trade in at break even if they anticipate price will breakout through the range in the opposite direction. This makes forex range trading flexible to suit the needs of different traders.
What are the Advantages of a Forex Range Trading Strategy?
With so many currency pairs to choose from and multiple chart time frames, there is always the possibility to look for range trading opportunities. This is great for those who do not have much time to dedicate to trading. Not only do ranges occur frequently on currency pairs, but they can be found on any other trading instrument including stocks, commodities and cryptocurrencies.
You can even set alerts via email or SMS to send you notifications when a range trading signal has appeared according to your range trading strategy. Alerts will save you from having to constantly stare at the charts all day waiting for ranges to form. This could for example be when price reaches a support or resistance level either side of the range. You may even place a limit order to enter a position for you if you are sure it will be a valid signal that does not require verification.
Range trading strategies can be very easy to implement once you know how to identify a ranging market. There are plenty of technical indicators built into online trading platforms that can help you to easily identify market conditions. Indicators such as the ADX, average true range and standard deviation can help identify ranging markets. The important part will be timing your trade entry, which can depend on if you are looking to trade a range reversal or breakout. Of course, as with any trading strategy, there will need to be sensible money management.
Range trading strategies can be used for short and long-term trading along with different trading strategies. Whilst ranges do not usually last for a very long time, if you enter a reversal in a range and price breaks out on the opposite side of the range, you can catch big moves at the very start. On the contrary, if you are trading range breakouts, this can also lead to trade setups that catch big moves with favorable risk to reward ratios due to the momentum range breakouts can gather. If price breaches a range, it doesn’t take long to realize this at which point a trader can act swiftly according to their trading strategy.
Fundamental factors can work in favor of range trading strategies. If there is a major news release that occurs during a range, this can increase the momentum of a range breakout and give traders the opportunity to catch some big moves. On the other hand, if there is no news due to be released and the markets are generally very quiet, there can be an increased possibility that the market will continue to range. I find trading towards the NY close and Asian open can give some range bound markets conditions.
As range trading strategies can target anything from just a few pips, range trading strategies may sometimes be susceptible to forex broker spreads and slippage. I would personally prefer to use an ECN forex broker in order to get trades executed at the best possible prices from their liquidity providers (LP’s) with reliable execution speeds.
What are the Disadvantages of a Forex Range Trading Strategy?
Forex range trading strategies can perform poorly if traders are not identifying significant enough market ranges. I have often seen beginner traders using lower chart time frames and trying to spot ranges that do not have enough importance in the overall bigger picture.
You may often find that a range on one-time frame may not be relevant on another time frame. Therefore, I would always verify a range is relevant across as many time frames as possible, especially the higher chart time frames which I find can have more importance over the mid-long term. These ranges can be watched by more market participants which gives them a greater emphasis. If you see a ranging market on the 15-minute chart but there is a strong trend on the 1-hour chart, you may want to wait until the trend momentum slows down.
A forex range trading strategy is unlikely to perform well without additional analysis on other factors such as fundamentals and price action. For that reason, the success rate can depend on much more than simply spotting a ranging trend. I would combine all types of market analysis with a forex range trading strategy to filter signals.
If the range trader is not using sensible money management and does not plan stop losses effectively, a range trading strategy can cause them to be whipsawed in and out of the market. It is important to realize that not every single trend trade will come to fruition and there will be losses which is a completely normal part of trading any forex strategy.
If for instance, the stop loss is placed either side of the range, there is a chance that trades can be taken out prematurely multiple times if price slightly breaches a range but still closes within it. For this reason, I would allow a small buffer either side of a range if trading range reversals. Furthermore, I would only take range trades that give a favorable risk to reward ratio of at least 1:3 so that one losing trade does not wipe out consecutive winners.
Forex Range Trading Strategies
There are thousands of forex range trading strategies that you can find online. You can also use the technical indicators built into trading platforms to create your own range trading strategy template that suits your individual trading style. The primary concept of range trading is to spot if there is a market range and then look to either trade a reversal at either side of the range or a breakout of the range.
Reversal Range Trading Strategy
This forex range trading strategy is when you wait for price to reach the top of a range for a sell trade or the bottom of a range for a buy trade. It anticipates that price will bounce back off (reverse) from either side of the range. Often, a trend trader will mark a range using support and resistance levels and use an overbought/oversold oscillator to identify a reversal.
- Mark support and resistance on the chart to identify a ranging market
- Wait for price to reach either side of the range or place a limit order
- Use an oscillator to find overbought/sold market conditions
- Confirm range trading signal with price action analysis
- Enter trade as price reverses
- Place stop on other side of range or recent high/low. Take profit once the opposite side of the range has been reached. Some traders may also lock the trade in at break even and stay in the trade longer to try and gain additional pips. You should of course adapt money management according to your own trading style as everyone is different.
Breakout Range Trading Strategy
Another popular way to trade forex ranges is to use a breakout trading strategy to enter once price breaches an ongoing range. I usually find that the longer a range has held for before it is breached, the more significant the breakout can be. You can mark important prices for possible breakouts using support and resistance lines, pivot points and Fibonacci levels. One key thing about breakout price levels is that many big players use them so the levels can have added impetus.
- Mark support and resistance on the chart to identify a ranging market
- Wait for price to break through support or resistance or place a pending order
- Enter the trade in the direction of the breakout
- Place stop loss and take profit on either side of support or resistance
Forex Range Trading Strategy Conclusion
Forex range trading strategies are very popular and flexible to suit all different trading styles. Finding ranges on charts is the easy part. The key to success with a range trading strategy will most likely be timing your entry and your money management. Of course as with any trading strategy, it will be important to have a good trading plan and trading discipline with your emotions under control.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all forex range trading strategy signals. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice forex range trading strategies, you can open an account with a forex broker and download a trading platform completely free of charge. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.