A forex range trading strategy is one that guides a trader on when to either enter or exit a position in a market that lack direction. It is obvious that the price movement of any commodity can take any direction at any point in time considering the nature of the trade. Sometimes the value of a currency pair keeps rises, which is known as an upward trend; other it depreciates (downtrend). In a trending market, it is obvious what the direction of the market is and traders are clear as to how to trade. When the market is not trending, it is said to lack direction, and is called ranging market.
Here is a simple forex trading strategy that can be used in a directionless market.
1. Finding the range
2. Timing the entry
3. Risk management
Understanding three of these steps and applying them well can help traders trade a ranging market
FINDING THE RANGE:
With the help of support and resistance levels/zones established, you are ready to trade a ranging market. To create this zone, series of short term highs are connected to form the resistance area, and series of short term lows are connected to form the support zones.
TIMING THE ENTRY:
There are many ways to time a position entry, one of which is with the use of an oscillator. Some of the oscillators that can be used are stochastics, RSI, and CCI. The function of these oscillators cum indicators is to track the price movement of the security. The result of this tracking is seen as the fluctuation of the indicator around the center line. The indicators apply a good deal of mathematical analysis in order to bring this to past. Looking at the fluctuations of the indicator, the trader is waiting for it to reach an extreme before taking any action to execute the trade. At the extreme, the support and resistance zone is reached and momentum turns price in the opposite direction.
To cap it all up, there is the risk management plan for the forex range trading strategy. It may not be a part of the main strategy, but it is always handy to have a plan to avoid or reduce the effect of risks on the trade. If the levels of support or resistance should break, then it is time to exit any range based positions. To do this, stop loss is used above the previous high when in the resistance zone, or below the current low when buying support.
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