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Identifying a Trading Range

Identifying a Trading Range

Richard Krivo, Trading Instructor

Instructor's Response:

Good question...
A currency pair can be doing one of two things: trending or ranging.
You will generally see the trend begin to flatten out and the pair will begin to trade within a defined and repeated level of support and resistance. We would like to see this on a Daily, 4 hour or 1 hour chart as a range on "minute charts" is not established enough to trade without a greater element of risk.  Also, since the smaller time frame charts have a narrower range, there much less "pip potential".
Ideally, one would want to see at least two tests of support and resistance (three is better) before declaring a range to be in place.
To trade a range, a trader would go long at support with a stop just below support or short at resistance with a stop just above resistance. The higher probability range trades will be those in the direction of the overall trend on the Daily chart. Also, when price action breaks out of the range, the breakout will likely (although no guarantees) be in the direction of the Daily trend.
See the historical Daily chart of the EURCAD below for some additional info...
chart 7 13 10

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.