Guest Commentary: Be Boring All the Way to the Bank: Play the Range in Aussie/Yen
Successful trading strategies are boring. The best traders find their patterns and set-ups and do the same thing over and over again. Thrill seekers often wipe out their trading accounts quickly. If you are looking for excitement, find it someplace else. Trading is a business, not a day out at the amusement park.
FIND YOUR SET UP
Markets trend. They trend up, they trend down and they trend sideways. Yes, sideways action is a tradable trend. Some analysts advise traders to stay away from sideways markets and some technical indicators do become less effective during neutral trends. But…
WHAT'S YOUR TIMEFRAME?
It all depends on your timeframe. For shorter-term forex traders, sideways trends can offer well defined support and resistance points and tradable opportunities. A range trading play might be boring, but it can offer clear risk levels and entry and exit points—everything a trader is looking for.
CARVING OUT RANGE
Take for example, recent action in the Aussie dollar/yen (AUD/JPY). Since mid-summer, the pair has shifted into a sideways pattern, seen below in Figure 1. Well defined range top resistance is seen at the 83.50/83.00 region, with range bottom support seen in the 79.60/79.40 range.
SELL THE HIGHS, BUY THE LOWS
A range trading strategy is very simple—sell the highs and buy the lows, and vice versa. Traders can play the range from the long side and then the short side for days or weeks, until it shifts back into a bull or bear trend. Stop-loss points are fairly easy to calculate; generally technical traders place stops several pips above the range top or below the range bottom.
REVERSE ON BREAKOUT
Ranges don't last forever, of course. Once a market shifts out of the sideways range and breaks out higher or lower the risk for a new trade is also well-defined. A trader can reverse a position and trade in the direction with the breakout to catch the new developing trend. The range top and bottom again offer good placement for stops.
MID RANGE PLAY
Daily Bollinger bands can also offer simple signals for mid-range plays, or spots to add to current winners. The middle Bollinger band line (which is the 20-day moving average), generally intersects the mid portion of the range. Generally, a rally above the middle Bollinger band line will target a test of the upper Bollinger line, and vice versa, while a market remains in sideways range-trade mode.
DON'T GET GREEDY
Another simple rule of thumb is that narrowing daily Bollinger bands reflect a decrease in market volatility, while a widening out of the bands reflect an increase in market volatility. If the Bollinger bands begin to expand it could be a clue that a range breakout is on the way.
Narrowing bands could also mean that traders may need to shorten up their profit targets. For example, the mid September peak in the pair failed to reach the late August peak. Don't get greedy, take profits as the pair is approaching the top (or bottom) of the range. A new position can be initiated on a reversal or breakout.
TARGET IN PLAY
Tuesday's action saw AUD/JPY push above the middle Bollinger line, targeting a test of the upper line. Market volatility has been narrowing, so the upper line is contracting and below the range top.
This is a lesson in taking what the market gives you. AUD/JPY might not make it all the way back to the 83.00 level, watch the upper Bollinger line as resistance and a spot to take profits on short-term longs. Then, once the market rejects resistance do it again on the downside.
WATCH YOUR PROFITS GROW
Find a set-up that is compatible with your personality. Become an expert on your set-up. Write it down in simple terms so your wife or sister can understand the rules for entry and exits. Scan the charts until you find that set-up and do it day in and day out. Use smart money management to protect your capital. While the set-up and trade implementation might lack in excitement, watching the profits in your account grow isn't boring at all.
By: Kira McCaffrey Brecht, Managing Editor at TraderPlanet.com
Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to firstname.lastname@example.org
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.