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Guest Commentary: Range Trading - How to Trade the Range Without Going Extreme

Guest Commentary: Range Trading - How to Trade the Range Without Going Extreme

Yohay Elam, Forex Crunch,

The summer months in the northern hemisphere are usually characterized with slower trading, with many currency pairs sticking to ranges. For range traders, this is the ideal environment, and some traders who don’t prefer ranges, switch into this summer style.

While the previous summer was far from a quiet one, trading was still slower most of the time, and will probably be so this time as well. This is the first article of a small series of articles about range trading, starting with how to trade the range itself.

Even the best ranging pairs (crosses in many cases, which have additional advantages) never trade in a perfect range – they don’t necessarily touch the bottom or the top. Buying at the very bottom and selling at the top may maximize profits when you trade, but has significant risks:

When you are waiting for an entry point, the pair may not touch the bottom or the top before changing direction and moving to the other direction – you may miss a good trading opportunity.

When you are already in a trade, the pair may skip the bottom or the top and you may find yourself seeing a nice profit but not realizing it, eventually seeing it eliminated.

When the pair already hits the range limits, it may continue moving in the same direction, break out of range and leave you either with a loss or with frustration of a missed opportunity.

Most of the time, currency pairs trade deep within the range - closer to the middle than the extremes.

So how can you trade it?

Enter a trade around 15% from the top/top: instead of waiting for the pair to touch the top or the bottom, something that may not happen or will end in a breakout, buy when the pair descends to the bottom 15% of the range / sell when the pair reaches the top 15% of the range. This is close enough to the extreme but not too far off, limiting the risks detailed beforehand.

The Take Profit point would be on the other side of the range, 15% below the top (in case of a long) and 15% above the bottom in case of a short. The reward on this trade is 70% of the range.

The Stop Loss point would be out of the range, 15% off the limits. This would be in a total of 30% of the range.

All in all, this is a risk-reward ratio of 70:30, or 2.33:1 and is less risky.

Do you trade ranges? If so, how do you trade them? What do you think about this idea?

Further reading: 5 Most Predictable Currency Pairs – Q3 2012

By Yohay Elam, Forex Crunch

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

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