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How to trade in a range-bound market?

We have already discussed trend trading in our previous blogs, where traders are on the lookout for upward or downward trends to enter the market. But the range in trading signifies something entirely different from the trends we have followed for so long.

When a market is in range, the price moves up and down between the support (low price) and resistance (high price). As the prices just bounce between the support and resistance level trying to break free without direction, it is also known as a trendless market.

The key idea behind the range trading strategy is to determine the levels of overbought and oversold currency pairs. And a range trader aims to have a possible profit by buying during oversold periods and selling during overbought periods. As such the concept of range trading can be applied at any time in a currency market but it is best to utilize it when there is no apparent sign of a trend in the market.

The market movement in range trading can be commonly classified into four: rectangle, diagonal, continuation, and irregular range. When the range market price moves sideways between an upper resistance and lower support, it is called a rectangle range. This range type can be identified even without indicators as the price movements create an obvious rectangle range, as the name suggests.

In diagonal ranges or also called price channels, the price ascends or descends within a sloping trend channel. The price channel can be rectangular, broadening, or narrowing. Whereas a continuation range is a chart pattern that occurs within a trend, and usually a correction for a predominant trend. Continuation range can occur in the form of triangles, wedges, flags, and even pennants. And the last irregular ranges are the ones without obvious price patterns. In this case, the price movements usually take place around a central pivot line with the resistance and support line cropping up around it. It’s harder to identify this range as there are no palpable price patterns to look for.

Now you know what kind of patterns to look for in range trading. While major currency pairs could be your first choice when trading trends, for ranges it’s best to opt for currency crosses. As you know, forex pairs that do not include USD are called currency crosses. So currency pairs such as EUR/CHF and AUD/NZD could be most effective when trading ranges.

Traders can employ several tools like oscillators such as Relative Strength Index and Commodity Channel Index or channels like Bollinger bands. Once you’re able to identify ranges and employ necessary risk management measures, range trading can open a lot of possibilities when the market is directionless.

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