How to Profit From Range-Bound Markets When Trading Forex
There are many different ways to trade the forex markets. You can go long when the markets are trending upwards, go short when the markets are trending downwards, or you can look for instances where the price appears to be overbought or oversold in order to trade any reversals that may subsequently occur. However in this article I want to talk about how you can trade range-bound markets.
Range-bound markets refer to currency pairs that seem to be trading sideways in a very narrow trading range. There is usually no clear trend present and the indications are that traders are generally undecided as to which way the price is going to go. As you can imagine these are some of the hardest market conditions to trade.
The problem you face is that you will often not realise that the price is trading sideways until after the event. When you are trading live you may well be confident in opening a new long or short position. However assuming the price is trading in a very tight range, there are still a few you can profit from these markets.
The first is simply to wait for the price to break out of this range, either upwards or downwards. You can either open a position a certain number of pips outside of the trading range or you can improve your chances of success by waiting for an initial breakout, followed by a pull-back into the initial trading range, followed by a second breakout. In most cases you will find that this second breakout confirms that the initial breakout is valid.
The other trading method you can use is to simply trade the outermost points of this trading range. This method is generally more suited to long-term trading because these sideways trading patterns are much more predictable. You simply open a short position at the top of the trading range and think about opening a long position at the bottom of this trading range. The major benefit of this particular method is that it carries minimal risk because you can place your stop loss just outside of this trading range in case the price breaks out.
Range trading is not something I do a great deal of myself because I prefer trading currency pairs that are on the move. Nevertheless just because a pair is trading sideways does not necessarily mean that you can't profit from the situation. As I've already mentioned, you can either trade the high and low points of the trading range or you can sit back and wait for a breakout. Both of these methods are equally as effective.