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Guest Commentary: Range Trading - Which Pairs Work Best?

Guest Commentary: Range Trading - Which Pairs Work Best?

2012-07-26 04:00:00
Yohay Elam, Forex Crunch,

During the months of summer in the northern hemisphere, many traders are on vacation and trading tends to slow down and become more range bound. Not all currency pairs have the same behavior and characteristics.

In general, crosses have a better chance of sticking to ranges, often narrower range than the majors or minors. However, not all crosses are the same. Here are a few things to watch out for.

This is the third article in the serious about range trading. A previous one dealt with trading the range, but not going extreme.

Since the outbreak of the financial crisis, currencies are generally split between the so called “safe haven” currencies and the “risk currencies”. The US dollar, Japanese yen and Swiss franc are sought in times of trouble – they are in the safe haven camp. However, the Swiss franc is effectively pegged to the euro. So for now, the franc is out of this camp.

All the others are in the “risk” camp, and are bought when there is more confidence.

This makes yen crosses less favorable for range trading. In too many cases of bad news, risk currencies such as the euro weaken against the dollar, while USD/JPY falls or remains stable. In such cases, yen crosses aren’t candidates for range trading.

Old continent cross: A popular cross is EUR/GBP: the pound tends to move together with the euro against the dollar. Liquidity is high in EUR/GBP, and it usually sticks to ranges, even though the deepening of the debt crisis sent flows from the continent to London.

Commodity camp: The Canadian, Australian and New Zealand dollars are often called “commodity currencies”, as these countries all export commodities. AUD/NZD is the first cross that comes to mind – the neighbors share a lot in common, and the cross trades in narrow ranges. However, these may be too narrow at times.

AUD/CAD is a better candidate. It doesn’t always move in ranges, but when it does, these ranges are clear and relatively wide.

Last but not least, we return to a major pair mentioned earlier: USD/JPY. While the yen often gains against the dollar in times of trouble, the threat of intervention by Japanese authorities to weaken their currency limits these moves. The end result is that the pair is range bound as well.

Do you trade ranges? What pairs do you trade?

Further reading: 5 Most Predictable Currency Pairs – Q3 2012

By Yohay Elam, Forex Crunch

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