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Guest Commentary: Range Trading - Entering the Range after a False Break

Guest Commentary: Range Trading - Entering the Range after a False Break

Yohay Elam, Forex Crunch,

When a currency pair trades in a range, the range is never perfect. Too often, a pair doesn’t reach the top before retreating towards the middle of the range, or doesn’t hit the very bottom before recovering.

Yet this is not the only case of a non-perfect range – a currency pair may rise above the top of the range or below the bottom before returning back into the range. For breakout traders, this is a frustrating false break. However, this can be an opportunity for trading the range.

This is the second article in the range trading series, prepared for the often steady summer months. The previous one dealt with trading the range, but not going extreme.

So, how can we trade this event?

Wait for the pair to get back into the range – the break cannot be a false break until it really returns to the range. It’s better to be safe than sorry, and wait for the pair to return.

Check out the news and see if fundamentals really point to a breakout or not. In many cases, a first false breakout is followed with the real big one. But in too many cases, there’s no justification for the breakout, and this is the opportunity to trade the pair in the range.

Enter the trade at around 15% below the top or 15% above the bottom of the range – this margin should satisfy in most cases – the pair is back in the range.

Place the Stop Loss at 15% of the range, above the top / below the bottom, in case of a real breakout.

Place the Take Profit within the range: at 15% of the range above the bottom / below the top.

As in the previous case, this is a risk reward ratio of 70:30, or 2.33:1, which is rather solid.

Do you trade false breakouts (aka “fakeouts”) in a range? If so, how do you do it?

Further reading: 5 Most Predictable Currency Pairs – Q3 2012

By Yohay Elam, Forex Crunch

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