Forex Strategy: What Is Range Trading?

The value of a currency pair doesn't trend in one direction; there is no uptrend or downtrend. Rather, the currency pair has specific fluctuations over a week or day that are fairly predictable. Simply put, the currency pair's value zigzags between a high and low.

Range trading is a Forex strategy that takes advantage of these regular fluctuations. For example, a range trader first determines a range, and then might buy into a currency pair at the low end of the range and sell when the currency pair reaches the high end of the range. A reverse trader can also short the range, buying in at the high value and selling at the low value.

To begin, a range trade must first analyse the currency pair. The majority of currency pairs have somewhat predictable swings throughout specific periods of time - it may be over a 4-hour window, 24 hours, or a week. Your technical analysis will give you a better idea of the average time between a high and low. Plus, to determine the range, you must find the currency's signal and resistance prices.

The signal is the current floor for the currency pair, while the resistance is the current ceiling. So for example, if you were examining a GBP/USD pair that fluctuated between 1.5000 and 1.4950; 1.5000 would be the resistance price and 1.4950 would be the signal price. And there would be a 50-pip range for this pair.

Setting Up a Range Trading Strategy

Once the range has been determined - in our example the range is 1.5000 to 1.4950 - you can think about entering and/or exiting trades for the specific currency. With this strategy, the trader would set an entry order for the signal price of 1.4950, and the trader would make a trade at the low end of the range.

Secondly, the trader would set a sell order for the top end of the range, the resistance price of 1.5000. Plus, there's also the possibility of short selling the range, by entering at the high point and selling at the low point.

Using trading software, these orders can be automated based on specific rules. Of course, the currency pair will likely trend out of this range, either above or below. Because of this, it's beneficial for traders to use stop orders above and below the sell or buy order points.

What Are the Benefits of Trend Trading?

One of the biggest advantages of range trading is making profits in a sideways-moving market. Often, day traders prefer to trade trends, as there is greater profit potential with larger movements in one direction.

Yet, although the profit potential in range trading might not be as significant, it does allow traders to profit when currencies aren't trending in one direction, which is happens quite frequently in the Foreign Exchange markets. The general assumption is that 80% of the time the markets trade within a range, rather than trending in one direction.

Another advantage is the simplicity. Once a range has been determined, the trader can set specific entry and exit points. The process is fairly straightforward. Additionally, compared to trend trading, the risk/reward parameters of range trading are much more defined.

Understanding the 24 Hour Market

For those who are or want to start trading the Forex market, some of you may be attracted to it because it is a 24 hour market. Unlike the equities market, the Forex market does not close (except on weekends) and trading is available from Sunday 10:00 pm GMT to Friday 10:00 pm GMT.

Is it really true that the Forex market is a 24 hour market?

True, trading is available 24 hours a day and the Forex market does not close. However, price movements are not equal throughout the whole period. The currency pairs can be active on a certain timing and at other periods, it may be dormant with little movements.

Trading a certain currency pair during its dormant period may result in the price movement not following through of what you have analysed, turning against you and get your trade stopped out only to resume its movement when trading volume picks up.

So, to prevent that scenario from happening, it is important to ask two questions to decide which currency pairs to trade.

Who is Trading?

By trading on the Forex market, one is always selling a currency and buying another at the same time, and that is precisely why the term "currency pair" is used. There is usually price movement of the currency pair when the financial centers of the countries using the individual currencies is open.

For instance, currencies involving the US Dollar (USD) would usually have price movements when the US market is opened, while the Euro (EUR) would usually have price movements when the Europe markets are opened. Therefore, the EUR/USD currency pair will usually have to have both Europe and US markets opened to have the price action follow through.

Who is Awake?

Now that we know that a currency pair has to have both of the markets to open for price movements, next question will be when are the markets open? For this, we will look at the few major financial markets and the six major currencies affected.

Wellington (NZD), Sydney (AUD): 22:00 GMT - 07:00 GMT

Tokyo (JPY): 00:00 GMT - 10:00 GMT

Frankfurt (EUR), London (GBP): 07:00 GMT - 17:00 GMT

New York (USD): 13:00 GMT - 22:00 GMT

Because a currency is active when the affecting financial center is open, therefore the overlapping market opening and closing timings is when the currency pairs will be most active.

The Bottom Line

Although the Forex market is a 24 hour market, not all the 24 hours are created equal. The price movement during 8am - 10am on a currency pair may not be the same during 8pm - 10pm. Thus when we sit down in front of our terminals wanting to trade in the Forex market, it is important to understand at that time, which of the financial centers are open for the trading day and this will define which of the currency pairs you will see price action movements. Trading at odd hours when there is no volume will only likely to expose yourself to the price actions not following through.