How to Trade Ranges in Forex?

While most traders seek to trade with market trends, the reality is that most of the time the market moves in ranges without a defined trend. According to data from some brokers, those traders who focus on trading in ranges tend to be more successful and obtain better returns more regularly than those who only trade based on trends.
That is why in this article we are going to provide a brief guide to trading in the ranges with the greatest efficiency using several important technical indicators and other tools that can help you identify the ideal times to enter and exit each trade.
We will also show the conditions under which this trading strategy should not be applied, especially at times when the market is experiencing signs of volatility and is going to move with a fairly strong trend.
Traders who normally trade in ranges do not take into account the direction of the market as they assume that sooner or later the price will return to its starting point. That is why they base their strategies on the possibility that the price will move between the same levels on multiple occasions, for which their goal is to make profits by taking advantage of these upward and downward oscillations.

Disadvantages of Range Trading

The main disadvantage of trading in ranges is that on those occasions when the price breaks one of the limits of the channel, it tends to move quite strongly in the direction of the breakout. For this reason, those traders who do not have adequate risk managementthey may suffer great losses.
Therefore, although it may seem the opposite, operating in ranges is not easy. That is why most of the great investors are dedicated to developing strategies based on trends since under these market conditions it is possible to earn a lot of money. However, it is possible to obtain good returns consistently in markets that move in ranges.
In the case of the Forex market, one of the most relevant aspects is to operate only with the currency pairs that show the greatest probability of staying in a range. Below we will provide a guide to trading ranges in the forex market, concentrating on the tools based on technical and fundamental analysis that increase the chances of success.

Supports and the resistances

Support and resistance are the basis of range trading as the price often bounces off of these. We can define support as a price level at which most traders tend to buy and resistance the price level at which traders tend to sell. The more times the market has failed in its attempts to break through support or resistance, the more important this will be and indicates at the same time that it is a level of indecision between buyers and sellers. Another aspect that influences the importance of these levels is the extension of the period of indecision, in this case the longer it is, the more relevant the support or resistance will be.

What pairs should I trade in ranges?

Before starting to trade with ranges in the Forex market we must choose the right pairs to do so. Traders interested in this type of strategy can benefit from choosing those pairs that are more likely to stay in a defined range for extended periods of time as opposed to others that tend to move in very strong trends. In this case, the key currency is the US dollar (USD), whose pairs generally move in trends. Below is a list of currency pairs to avoid when trading ranges:

• EUUSD
• USD/JPY
• GBP/USD
• USD/CHF
• USD/CAD
• AUD/USD
• NZD/USD

For this reason, the most suitable pairs for range-based strategies are those that do not include the USD and which are influenced by the divergence in performance between the two countries in question. Among the pairs that we can take into account are the following:

• EUGBP
• EUCHF
• CHF/JPY
• GBP/JPY
• AUD/CAD
• Others.

In this group of peers we can find several low risk and others high risk. Low risk pairs are known as those that move within a relatively narrow range while high risk pairs are those that fluctuate in a wider range. Low-risk pairs are safer to trade but offer lower profits. On the contrary, high-risk pairs offer a higher return but at the same time a higher risk.
One way to determine the risk level of a currency pair is through the interest rates of its currencies. The difference between the interest rates of two countries usually affects the range that the pair formed by their currencies operates.
For example, the differential between interest rates in the European Union is much lower than that between Japan and the United Kingdom, which is why the GBP/JPY pair is more volatile than the EUCHF. From here we can define the following rule:
The higher the interest rate differential between two countries, the more volatility the pair will have and the higher the range in which it oscillates.
It is important to take this rule into account and accommodate to the volatility of the pairs since an operator who likes low risk and therefore prefers safer operations should trade in pairs in which the spread between interest rates is small.
On the contrary, in the case of a trader who has a preference for high risk since he expects that his operations will produce high returns, he must operate in pairs whose differential between interest rates is high. Ignoring interest rate differentials before trading ranges can lead to potentially winning trades ending up in losses.
In this case, currency pairs with low ranges and that allow trading with relatively narrow stops and with large volumes are the EUGBP and EUCHF, while the crosses that have high ranges and require wider stops with larger trading volumes. smaller (and less leveraged) are GBP/JPY and AUD/JPY among others.
It is very important to keep this in mind before formulating the trading strategy. For example, if we are trading a pair as volatile as the GBP/JPY there is not much point in trading with a very tight stop as the price is likely to reach it before moving in the direction we want. Also, that same volatility makes it dangerous to trade very large volumes as the potential for losses is high compared to a lower range pair.
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Technical indicators for range trading

There are several technical indicators that can be used as quite useful analysis tools since they were specifically designed for ranging markets, however it is important to know what they are and under what conditions to use them. Some allow detecting overbought conditions (in resistance) or oversold (in supports) in the market, as is the case with oscillators.
Some indicators that we can use when trading ranges are Stochastic Oscillators , MACD , ADX , Bollinger Bands, RSI and CCI. Next we will explain how two of the most useful indicators are used when trading with ranges:

Using the RSI in range trading

The Relative Strength Index or RSI is an oscillator that is among the most popular indicators today. It was invented in 1978 by J. Welles Wilder and what it basically does is compare the magnitude of the recent gains in a specific instrument (a currency pair, a stock, etc) with the recent losses converting the ratio obtained into a number that fluctuates between 0 and 100.
If we are trading a currency pair that moves in a range, we can apply the following rules to trade based on the RSI:

• Open a buy position when the RSI crosses from below to above the 30 level.
• Place a stop loss about 10 pips below the previous low as a protective measure.
• If the trade develops in our favor we close the position and take profit when the RSI reaches the overbought area at the 70 level.
• Wait for the RSI to lose strength and cross below the 70 level at which point we open a short position.
• Place a stop loss about 10 pips above the previous high as a protective measure.

If the trade develops in our favor we close the position and take profit when the RSI reaches the oversold area at the 30 level.
If we see the following image, several examples of operations carried out applying these simple principles in the EUGBP pair are shown:
https://preview.redd.it/3ax9wjnuhno91.png?width=610&format=png&auto=webp&s=5b23b52a3b1ac869b3aac79ec437cd97a28d2275
The green circles mark the buying operations and the orange circles the selling operations. The dotted lines indicate the 30 and 70 levels of the RSI. Being a pair that mainly moves in ranges during the period analyzed in the chart, the signals derived from the RSI were quite reliable as you can see, producing in most cases winning trades.

Using Bollinger Bands in Range Trading

Bollinger bands are a particularly useful indicator for range trading just like the RSI so it can be combined with it when analyzing ranges in the market. What this tool does is compare relative price levels and volatility during specific time periods. Bollinger bands are made up of three lines that encompass most of the price action.
The idea with this is that when the price touches the upper band it is an indication that the market is overbought since it is above the average and if the price touches the lower band it is considered that the price is oversold since it is above the average. below average.
Based on this, when the market is in a range, traders should buy when the price is touching the lower band (oversold market) and sell when it touches the upper band (oversold market).
In this case, the standard configuration of this indicator is used for its moving averages, which is 2 periods. Although the concept is easy to understand, the following graphic example will make it easier to visualize:
https://preview.redd.it/byz6n7vshno91.png?width=586&format=png&auto=webp&s=0249ebad148f0dbba7f9ed646262864a8b97b042
If you use the RSI, Bollinger bands or any other indicator to trade ranges, the important thing is to know when and how to use them so that the signals they produce are reliable.
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