Trading Forex Ranges

02/12/2015 9:00 am EST

Focus: FOREX


Walker England, of DailyFX.com, thinks all forex traders should have—not just a trending market strategy—but one in place for when markets fail to trade in a singular direction. Today, Walker outlines a range trading strategy, citing a currency pair example for support.

Talking Points:

  • Look for Ranges When Trends Stop
  • First Find Support & Resistance
  • Use OCOs Near Key Charting Values

While trending market strategies are always popular, traders should have a plan when markets fail to trade in a singular direction. This way, instead of being deterred by sideways price action, traders will have a plan in place to adapt to present market conditions. To help with this process, today we will review the SRTS range trading strategy.

Learn Forex—EUR/USD 30-Minute Range

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Find the Range

The first step of any range trading strategy is to find the range. This can be done by identifying key values of support and resistance on your chart. To begin, add a 30-minute chart to your screen, which includes a minimum of 1 weeks’ worth of price data. Resistance is your price ceiling and can be found by connecting two or more price peaks on your graph. Next, identify values of support by connecting a series of swing lows. These areas may not line up to the pip, but remember to draw these lines as parallel as possible.

Above, we can see a sample range on the EUR/USD currency pair. After looking at a week’s worth of data, support is found by connecting a series of lows near 1.1275. Resistance is found overhead by connecting a series of swing highs near 1.1350. These points create an active 75 pip range, which will become the basis for today’s strategy. It is important to clearly identify these points prior to moving forward to the next portion of this strategy.

Learn Forex—EUR/USD Range with Entry and Stops

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

OCO Entries

When trading an active range, it is always important to plan your entry as close to a support or resistance value as possible. The SRTS range strategy uses an OCO (one-cancels-the-other) order to achieve this task. The idea behind this type of placement is to set one order to execute a sale at resistance, while another pending order, to buy the market, resides at the corresponding value of support. This way, if price is trading in the middle of the range you will be prepared to buy or sell regardless of the direction of the market.

Above we can see a sample range setup developing on the EUR/USD. An OCO order would be set looking to sell the EUR/USD at 1.1350. Conversely, a buy order would be set to enter the market at 1.1275. With price currently in the center of the range, a move to resistance would execute the pending sell order while canceling the buy order below at support. If instead, price first moves to support, the pending buy order would be executed while the sell entry at resistance would be canceled.

Learn Forex—EUR/USD with Sample Limit

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Stop and Limit Placement

Just as trending markets can come abruptly to an end, so too can ranges. Eventually, when price breaks from its range, any existing trades should be closed. When initiating a buy order, stop orders should be placed above resistance. Any easy way to determine the exact placement is to take half the value of the range in pips and add this to the top of the range. When buying support, stops can be managed in the same way; subtract half the range in pips from support to find your final stop placement.

When it comes to profit targets, basic range trading strategies will use a standard 1-2 Risk:Reward ratio. This means that your limit placement should look for twice the amount of pips relative to your stop. For example, if a sample range has a 100 pip range, a minimum 100 pip profit target is suggested along with a 50 pip stop.

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

By Walker England, Trading Instructor, DailyFX.com

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