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Wednesday, April 10, 2013

How to trade calm range



I want to start the article by referring back to my last post where I said that I expected Japanese Yen to strengthen against all other pairs. As you may see the trend shift (from bearish to bullish) did not materialize and my stop losses were hit. However, it was a ‘pre-planned’ loss and I am not stressed about it at all. I often start building a line of my positions in the direction of an ‘expected’ trend and if it does not happen I can suffer a loss of about 10 to 15 percent. However, if it does happen I easily double my account. That happened a lot of times. The most important thing is to limit your losses and multiply your profits when they come. Ok, now let’s move to today’s topic – calm range trading strategy.

If you want to consistently make money trading you must take only those trades that offer you better odds of winning and ignoring those that are average or poor ones. This might be said easier than done, but as practice makes everything perfect you can learn to find these high profitability odds trades quite easily. The hardest thing, actually is not to find them, but to patiently skip all those daily ‘half-good and half bad’ trades.
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In order to be able to find these high profitability trades you need to define what state a market you want to trade is in and how this ‘state’ is traded best. Markets can be in four kinds of states:

  1. Volatile trend
  2. Calm trend
  3. Volatile range
  4. Calm range
Each one of these has its’ own specifics of trading. Each one of them can be very difficult to trade if you just come at any place a market is in and expect to make a trade. No, you need to define areas where the market will reverse or break out and trade the areas accordingly. I want to write a series of articles describing each specific market condition and how you can trade that. Today will be the first article on calm range. I prefer this type of market to volatile range as entry and exit points are much clearer and you can place smaller stops than you have to do in a volatile range markets. 

Defining calm range

So, what is calm range? It is a market that is consolidating after some swing or trend move. It is a market that has quite clear points of bottom and top. The market moves within these limits in a very orderly fashion. When a bottom is hit the price forms a reversal pattern and starts orderly moving upwards by forming higher highs and higher lows. The same happens when the top of the range is hit. The price forms a reversal pattern and then in a very orderly fashion starts moving down by forming lower highs and lower lows. 

Finding high and low of the range

The first step to trade that you need to define the highest point of the range and the lowest point of it. Now, the range can be narrowing so you need to see how these support and resistance areas change! If we talk about Forex we know that by nature some currency pairs are more volatile and some are very orderly. The most orderly pairs are eur/chf and eur/gbp. If you are a conservative trader and want to trade less volatile pairs the above mentioned ones could be a good option for you. 

Let us skip eur/gbp and look at eur/chf as it is in pretty calm range at the moment. After a sharp move down the pair formed the low of the current range (it is consolidating) at 1.2118 (on the 26th of February) and the high of the range at 1.2390 (on the 8th of March). It then started making lower highs and lower lows (clear sign of a swing low). The further it went the more the move down slowed. It is a clear indication that more buyers (of Euro) started coming in. Then at the end you can see a cluster of daily candles with very small lows. A break above the highs of those could have been a good long entry point if you trade these calm ranges. You can see that it came very very close to the above mentioned lowest point of the range. 


Signs of an impending reversal

When you see the pair coming to this support point you would naturally expect a reversal. How to judge whether it will happen or not? I want to see those clusters of candles when the price finally fails to hit new lows and runs to some daily resistance point. At this point you can see a lot of volatility and very narrow daily range. The pair goes to the low of the day and then back to its’ previous day’s high. It can continue for three or four days. This is a clear indication that a breakout is coming and the odds are that it will be upwards. That is exactly what happened with eur/chf. Market moved through the resistance of three days’ high when the news from Switzerland failed to meet market’s expectations. A buy stop above 1.2171 could have been an excellent level to enter the market. (Other signs I look for: Alternatively 123 reversal pattern may also be formed, which would indicate of upcoming reversal. Bullish candles also tell me about a swing change).

Exit points

Now, where could we exit our trade? Following classical technical analysis definition we know that previous support becomes resistance and previous resistance becomes support. So, we need to check to see where the market reversed near resistance to find our exit point. We clearly see that 1.2300 level served as support for some time till fundamentals came and the market crashed. This is our exit level. I tend to exit the market ten pips earlier, so possible exit level is 1.2290 now. 


Catalysts of a reversal

One more important thing to remember is that market often needs a catalyst to break through some resistance or support point and that catalyst is often fundamental news. So, when you market your technical points and expect a reversal be sure to look at your Economic calendar to see what fundamental news events are coming to be aware of possible fundamental catalysts. 

Ok. I hope you benefited from the post. I would continue the topic of different market states in my next post. Hope to do it very soon! If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.




Disclaimer
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.