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.

Helpful Forex Pointers for Beginners

The Forex market is the biggest financial market worldwide with major trading locations distributed across several different time zones. Consequently, it is the only financial market that is open for twenty-four hours per day with noteworthy liquidity throughout the day. This makes the currency market suitable for traders who don't wish to drop their day jobs. Even though becoming a Forex trader can be both thrilling and satisfying, the risk of losing considerable amount of cash is very real. To help you have more good trading days than bad ones, here are some things to keep in mind.

Choose a reputable broker

In comparison to other markets, the foreign exchange industry has significantly less supervision. This means that the chance of being ripped off is high. You must only sign up for an account with a broker who is currently registered with the regulatory body of your country. In the US, brokerage firms need to be a member of the National Futures Association and recognized by the US Commodity Futures 

Trading Commission.

In addition, you need to find out what the broker's services and products are, the amount of leverage available, details about commissions and spreads, and account funding and withdrawal procedures. Select a broker with a quick and professional customer service staff.

Create a trading plan

Trading without proper planning can be disastrous to your trading account. Sans a plan, it is likely that you will end up trading using your emotions. When you have a trading strategy, test it to see if it really works in a consistent manner and if it provides you an advantage.

Have a record of your trading activities

Maintaining a record of your trades will give valuable insights as to which trading patterns you use provide constant income. This may also alarm you of strategies that aren't as worthwhile so you can make the necessary changes.

Learn how to use stop loss orders

One method to avert considerable losses when trading in Forex is making use of stop loss orders. Placing a stop loss order lets you figure out your allowable loss per trade ahead of time. This tool is also beneficial when you are unable to oversee your trades for long periods.

Use leverage with utmost care

Large amounts of leverage can be accessed by Forex traders. Used properly, leverage can help you earn more. Then again, it can also amplify your losses if you are not careful. Even though using leverage will allow you to open a much larger position, novices should go for smaller positions initially to minimize risks.

Learning various effective strategies and building your own trading pattern can help you increase your profit potential and avoid losing money unnecessarily. If your are a beginner and want information on forex trading, please visit here.

The Three Most Common Mistakes Forex Trading Newbies Make

Join one day the stressful world of the forex market and you will soon understand that this is an information jungle in which it is very difficult to navigate in. Under a constant pressure to increase short-term returns, many traders, especially beginners make mistakes that leave them most often at the edge. In this article we will discuss the three most common mistakes a beginner should try to avoid. To survive long term, arm yourself with an adequate knowledge of the forex market to avoid wasting valuable time and finally seeing all your savings go up in smoke.

I suggest you go through three errors that seem to be most common when someone starts in forex trading.

First Mistake: Responding Too Soon on Financial News

You're excited because you spotted today an economic event that will influence the market and create high volatility. Either you have your own idea on what will happen, so you stand before the release of the figures, or you know nothing but that doesn't keep you from remaining glued to the screen, ready to draw conclusions the slightest fluctuation.

In the Forex market, economic news often causes whiplashes. Significant fluctuations can occur due to twists, undervalued reports, or simply an inaccurate perception of the situation. A lack of liquidity and management plan febrile capital leaves many traders with significant losses once it appears that the news should have been dealt with in a different way.

The slightly smarter traders take a step back and wait a clearer picture of the market situation. They remain calm, follow their management plan, responding rationally. Rather than taking your pulse, first allow a stable trend emerge. Before the first movement, make sure you have a solid business plan. This will allow you to minimize the risks by controlling and reducing the exposure of your capital in strong inversion.

Second Mistake: The Average Down

Almost all traders get to know one day or another the average down. This is a very sensitive technique that can be used effectively by experienced traders, but the beginner can quickly get into trouble by applying it.

To put it simply imagine the following situation:

- You buy EUR / USD at price X because you think the price will go up soon. - Gold continues to drop but you are convinced that it will soon go up. - Suddenly you still buy EUR / USD at a lower price to your starting X price, just to make more profit when prices will begin to rise. - By doing this you can further reduce your overall average purchase.

Unfortunately the market trend that you had anticipated did not occur, so you have to undergo a loss that could have been avoided very easily.

This kind of scenario is very common and many traders sooner or later are faced with this situation. However, averaging down, is valuable time lost and unnecessary resources put on a losing trade.

Firstly, your time would be better placed in positions with greater financial viability and prospects for long-term gain.

Second, it is difficult to replace the "invested" capital in what is essentially a sinking boat. For any capital spend, the adequate profit needs to be made in order to achieve a healthy balance. By injecting money to save a losing position, you cripple your overall capital growth.

While some may argue that many average downs were successful for most traders the final result often ended in a loss. Trends last longer than traders' liquidity and particularly traders whose horizon is very short. So the first rule is to avoid wasting your resources via average down.

Third Mistake: Risking large sums of money

Investing all your capital on one position does not mean that you will increase your chances of becoming profitable. Almost all traders who risked large sums on specific positions ended up losing. If I had to summarize this form of trading activity I would say it is more or less bad risk management. Hotheads do not last long in the forex market, or in any other investing forms of business.

A general rule shared by many traders, says that no more than 1% of your capital must be invested in a single position. This percent is to be understood in the context of the difference between the input value (position) and the output level.

Here's a management rule that you can follow in order to avoid excessive exposure of your funds:

- For a day's trading risk a maximum of 1% of your average daily profit in a month

This will help you avoid putting your capital at severe risk with any of your transactions. Whatever losses may incur, they can easily be regained in a period of about a month, leaving you enough time to make up for the lost income.

To conclude we need to stress the fact that all these mistake occur in the absence of risk management. To avoid falling into these traps, make sure you always have an alternative and realistic plan that takes into account long-term growth. In the case of the average down, have an exit strategy and know when to cut your losses. Remember, trading is all about management and not some random betting card game.

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