Range Trading Strategy
Ranges occur in the Forex market about 70% of the time. Having a strategy to take advantage of these conditions could be a smart move if you are a trader who enjoys trading frequently and a higher win % suits your personality. In this post, you will learn a simple range trading strategy allowing you to take advantage of the most common market environment.
The approach that I will be showing you is the basis of a range trading strategy, it can be built upon and improved, follow the rules and you will be on the right track.
What is a range?
A range occurs when a currency pair trades between two defined zones of support (demand) and resistance (supply). Therefore, price is confined (ranging) within the area between these levels.
Range- EURGBP H4
How to trade a range?
Step 1- Identify the range
Before you can trade anything you need to identify the pattern, identifying a range is simple using the definition and example above. However, some considerations have to be made when you want to trade this approach successfully.
- Before a range can be confirmed there must be 2 tests of the support zone and 2 tests of the resistance zone. Without this confirmation, you will find yourself with a horrible win % because you will be trading minor support and resistance levels instead of a valid range.
Valid Range- EURGBP H4
- The other important factor when identifying ranges is that the market should be choppy/ range-bound on the timeframe that you are trading. If there is currently a range but the timeframe being traded is trending then conditions do not favour placing a range trade, and you should not be trading when the conditions are against your system! Patterns like these are called continuation patterns because they favour the continuation of the trend.
Continuation pattern- USDJPY H1
Step 2- Wait for a test of support or resistance
Once you have identified the range, confirmed that it is valid and checked that the conditions are in your favour; the next step is waiting for the support or resistance zone of the range to be tested.
Patience is required, do not force trades and break the rules of the system.
Waiting for a test- EURCAD H4
Step 3- Enter if strong candle prints
Here is where you get the confirmation that it is time to place a trade. Should a strong candlestick print after a test of the support or resistance zone, then enter the trade (another factor before entering is the risk to reward ratio but we will discuss that in the next step).
At support, we are looking for a strong bullish candlestick to trigger a buy trade, at resistance we are looking for a strong bearish candle to enter a sell trade. We will use the same EURCAD range to showcase both a buy and sell.
Overall higher timeframe view of range- EURCAD Daily
Range strategy buy position- EURCAD H4
Range strategy sell position- EURCAD H4
Step 4- Set stop loss and take profit levels
With a sell position, the stop loss should be put above the resistance zone and the take profit at the bottom of the range (support zone)
However, before entering the trade you should consider your risk to reward ratio. The minimum we want in this strategy is 1:2 i.e. the TP should be twice the size of the SL.
The reason that stops are set past zones is because if price extends past then the range trade is wrong, TP’s are set at the opposing side of the range because price is likely to turn at these levels.
Buy SL and TP- EURCAD H4
Sell SL and TP- EURCAD H4
That’s all folks, there you have the core aspects of a successful range trading strategy. Yes, with testing and experience you can improve it further. Does it seem too simple? All you have to do is identify the range, wait for a test, enter if there is a trigger and manage the positions, but in Forex trading, the simplest approaches are usually the most profitable.
If range trading appeals to you…
Enjoy the support and resistance ping pong.