Forex Trends and Trading Range – Explanation
Every Forex trader must know how to identify whether the market trends, or trading within a range. It’s your job to determine in the early stages of your technical analysis, which type of market is currently taking place. It is usually simpler to trade during trend times, and much harder to earn profits when prices are almost unchanged. However, there are decent strategies for both scenarios. Certain indicators and trading methods would work perfectly well during a ranging period but will not be effective at all during Forex trends, and vice versa. That’s why this is one of the most critical decisions, that in many ways will determine your trading success, or failure.
In general, Forex traders gain profits from fluctuations in the foreign exchange prices.
Obviously, the goal is to buy low and to sell high, or, on the contrary, to sell high and then to buy it back at a lower level. When examining the price chart, it is easy to notice that the forex market spends most of its time trading within ranges, and much shorter periods of time in clear trends. The ability to recognize these market behavior and changes, would give you a highly important edge. But first thing first. In this short article we will get to know the basic definition between forex trends and ranges. In following articles we will go to some more in-depth concepts and practical trading strategies.
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Differences Between Trending And Ranging Markets.
Forex trends take place when prices continue to go up, or down, over a significant period of time. In an up move, each rise should reach a higher high than the previous one, while in the case of declines, the movement should be stopped at higher levels than the previous one. Conversely, in a down movement, each decline drops to a lower point of the previous fall, while each rise should be stopped in a lower high than the one from the previous rally. For more information check out How to Identify Forex Trend. When the market is trading in a range, most movements stop at around the same highs or lows. You can consider a market as ranging once the price action reaches the same support or resistance area 3 times or more.
Always take into consideration the time frames you use for your analysis and for the trading itself. A weekly chart of certain asset might be ranging, but it doesn’t really matter if you are a scalper who uses 1 or 5 minute charts. Define the nature of the market in accordance with your trading style. However, you must know that finding a confirmation within a longer time frame will improve your performance significantly.
If for example a daily chart indicates a ranging period and so does your favorite 1H chart, you can confidently rely on that trading range to proceed.
These two cases require different approaches and strategies. When the market rallies and you open a long position, or declines and you entered a short position, you have to trust the trend not to be shaken out so easily. Hold on as long as the trend continues.
Odds are in your favor. A market that is trending tend to proceed. Until proven otherwise. Don’t try to predict its reversal, as that what most traders do and lose their money while going against the overall direction.
The case is different when you are active in a trading range. You should closely track your position, and close it with when the first reversal sign occurs. A useful thing is to trade in a ranging market while using Momentum Indicators. These technical trading tools, indicates overbought and oversold levels, where a reversal is expected to occur.
For more information read about Momentum Indicators In Technical Analysis.
A basic major difference between forex trends and ranges is regarding the trading tactics you should apply – during trends you should go with the strong direction, to buy when it goes up and sell when it drops. However, in a trading range, you should do just the opposite – buy the weakness, and sell the strength.