How To Trade Ranges?
Download the Disciplined Trader 71 page FREE book on how to develop your trading plan just now before it gets pulled down. Get these Forex Scalping Cheatsheets FREE. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade. Most of the time, markets range. Ranging means that the market is moving sideways with no clear trend present in it. Ranging is also known as Consolidating. So, when the market is ranging, the best trading strategy is range trading.
First, you need to determine whether the market is ranging or not. For this you can use the Average Directional Index (ADX) Indicator. ADX is used to measure the strength of the trend in the market. Low ADX readings indicate that the market is ranging. As a rule of thumb, when the reading is between 0 and 20, it is an indication of a ranging market.
Now, when the market ranges, it moves between two almost horizontal lines called support and resistance.Support is the zone where the buyers enter the market in large numbers thinking that the price is low enough for them to make an entry into the market. In the same manner, resistance is the price zone where sellers enter the market in large numbers thinking that the price has become too high and this is the best time to take profit.
So, price action will move like a ping pong ball between the support and resistance. You can think of support as the floor of a room. When you hit the floor with a ball, it will bounce up towards you. In the same manner, think of the resistance as the ceiling of a room. When you will hit it with a ball, the ball will bounce down and return to you.
This back and forth movement of the price action will continue as long as the market is ranging. Now, almost something like 70% of the time, the market ranges. In range trading, you enter the market when the price action hits the area of support and exit when the price action hits the resistance. You keep on doing it as long as the market ranges. Now, your profit will depend on the width of the range. Width is the number of pips between the support and resistance lines. If the width is too narrow something like 10-15 pips, it is an indication of a very tight range that might not be worthwhile the effort to trade.
But if the width of the range is like 20-40 pips, you can do range trading and make 20-40 pips each time you enter and exit the market. So, you will have to learn range trading as most of the time, you will find the market ranging!