GVI Jay 12:40 GMT September 12, 2009
Subject: Range Trading
Kaprikorn. Aa we have discussed, I have never read a book on trading (except the one we wrote) and anything I say is just from my personal experience.
The FX market tends to trade ranges, even during trends when the market pauses and consolidates. These ranges can often lull the range trader into a feeling of complacency and this is when some get into trouble when the trend reasserts itself and the trader either doubles up on a loser or holds on hoping the market will come back into range. This is why we suggest always using a stop.
Without going into too much detail, this is my approach:
- Always be aware of the broader trend (e.g. daily charts) - that is what drives the real money flows and where there is risk of technical breakouts, reversals or corrections.
- For example, if you are trading in shorter time frames, such as 5 mins, 15 mins, 1 hour, you can trade those trends but put them in perspective vs. the broader trend and don't treat them as the underlying trend in the market. It is too easy to get lulled into thinking the 1 hour, for example, is the real trend when in fact it might just be a counter trend to the overall trend.
- If trading against the overall trend, be quicker to take profits than if going with the trend as the market will tend to reverse quicker
- Better chance of seeing your levels again if you are with the overall trend and market moves against you
- Look for anything in the daily chart that will change the overall trend. This will tell you what the risk is in the market
- One example that is worth reviewing (see chart above)-- note the summer range for the eur/usd but look at the broader trend to put it in perspective. There was a major trendline on daily charts that was never threatened. There was also a minor up channel that stayed intact despite times the eur/usd looked like it was heading lower. This is what I mean by the broader trend. Of course, it is easier to discuss this in hindsight with the help of the chart but it does show a good lesson in keeping the broader trend (and risk) in perspective.
This just scratches the surface but hopefully gives some insights into trading ranges.