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Identify Great Levels For Trading Range Extremes

Identify Great Levels For Trading Range Extremes

2014-06-27 19:00:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • A Different View of Volatility
  • Looking for Range Extremes
  • Trading EURJPY & Other Extremes Short Term

This summer has brought news but few breakouts. This has caused many traders to rely on range trading over trading trends. The problem with trading trends in low-volatility environments is that breakouts can revert back to the range. Therefore, it’s important to have a methodology to enter trades on an extreme within a range to help you enter well with well-defined risk.

A Different View of Volatility

Volatility is often seen as synonymous with risk. That can be a rough view of volatility. Volatility is often better seen as how much variance in price you experience. A simple example would be to compare the volatility in 2008 vs today.

Learn Forex: EURUSD Weekly ATR 2008 vs. Today

Identify Great Levels For Trading Range Extremes

Presented by FXCM’s Marketscope Charts

Often, a better view of risk is the loss of capital as opposed to the Average True Range variance.

When Volatility is very high, the markets often are one directional. When volatility is very low, like today, then you want to look at moves that are bound by support and resistance.

Looking for Range Extremes

Now that you know that volatility isn’t necessarily equivalent to risk but more explanatory to the market environment you’re trading, we can look to recent extremes. Because price is less likely to move very far, it’s best to identify recent extremes. In addition to identifying extremes, you want to see if price is ranging or trending.

Learn Forex: Don’t Mistake Low-Volatility with Inability to Trend

Identify Great Levels For Trading Range Extremes

Presented by FXCM’s Marketscope Charts

A trending market continues to break resistance in an uptrend or support in a downtrend. A Ranging market will move in between resistance and support without breaking. This is the environment we’ll discuss today however there is on keynote. Low volatility does not equal non-trending environment. Low-volatility often means that the trend will develop slowly as opposed to aggressively.

Trading EURJPY & Other Extremes Short Term

Traders can use multiple tools to find range-extremes. The three that we’ll discuss here are:

-Trendline or Price-Channels

-Pivot Points

-Fibonacci Level Extremes

Learn Forex: EURJPY Displaying Multiple Levels of Support through Three Items Above

Identify Great Levels For Trading Range Extremes

Presented by FXCM’s Marketscope Charts

Looking above, you can see multiple levels came together near the low price of EURJPY on the day around 137.95. While price could eventually move lower, that confluence gives you a clean level of support to buy against with a stop below the low and a take profit near the top of the range for a risk: reward of 25 pips risk: 100 pips reward.

In terms of Fibonacci extremes, it’s helpful to look for levels on the expansion tool that often see a move stop and turn. The common levels are 100%, 161.8%, 261.8%. These levels give you a strong risk: reward ratio when combined with other tools that market support.

Now that you're armed with a method of identifying range extremes, feel free to try this information out on a FREE Forex Demo Account with access to multiple markets.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, emailtyell@dailyfx.com

To be added to Tyler’s e-mail distribution list,please click here

Tyler is available on Twitter @ForexYell

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