Range trading comes into play where it becomes impossible to create trend lines and channel. This is because the trader cannot interpret if the price is going bullish or bearish. Although many traders just wait for the trend to set in, many make huge profits even in this scenario. Let us see how it is done….
The first thing that you should identify in a range trading is the resistance and support. Resistance is created by joining the recent highs and support is created by joining the recent lows. Here is the chart showing how it is done:
The above chart is showing a resistance level near 1.5600 mark and a support level near 1.5500 mark which means you have a trading range of 100 pips.
Remember, whenever you start your analysis in the range trading, make sure that you always create the resistance and support areas first.
Once this is done, it is the time to design our strategy for trading. Trading in such a scenario demands a non-bias approach to the market as the price is moving sideways and not up or down. Unlike trend lines, you cannot decide if the range is bullish or bearish. You can even buy or sell, and for this, all you should do is just wait till the market hits a support or resistance. Remember, waiting with patience can do wonders.
As in range trading price is the central thing that you need to take into account. Unlike normal trend line or channel where there are two types of scenarios: buy or sell, range trading has three types. Along with buying or selling, many experienced traders even opt for OCO (one cancels the other).
So when the price reaches the resistance level of 1.5600, the traders will sell the currency pair. This figure of 1.5600 is derived from the resistance line drawn in the last chart. And when it reaches the support level, the trader opens the position in the market by buying the currency pair at 1.5500. In the third scenario i.e. OCO, the trader will both put an order of buying at the support and selling at the resistance with stop loss. So in the even sell order is executed, the buy order will cancel automatically, and if the buy order gets executed, the sell order cancels automatically. All this is interpreted in the following chart:
Range trading looks so easy, but there are times when the price breaks past our mark for which we put a stop loss close to the support and resistance price. It is crucial to put stop loss as the market is highly volatile and the price can shoot to unknown limits.
You can see in the chart that we have added a stop loss of 25 pips above and 25 pips below our support and resistance levels. Forex Trading without stop loss can be done when you are playing with smaller pips, but when there are at least 100 pips, one should never forget to put a stop loss.