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Tuesday, April 23, 2013

Volatile range trading strategy

So, it is high time to discuss the last market state: volatile range and try to define how you can trade it. I just want to remember that according to my definition are four types of market states: calm trend, calm range, volatile trend and volatile range. Each has specific conditions that make prices move in a unique way and specific strategies to trade these moves. Volatile range is probably the most complicated market state as it is pretty difficult to trade. However, as I do not believe that markets are random I will try to share with you some insights of mine regarding the conditions of this specific market state. 


See also my other posts and videos on the topic:

What is volatile range?

Volatile range is directionless choppy price action that is most often contained within specific market range, usually a very small one. It often travels from one small range to another, then back, then to the first level again. These kind of ranges often develop after huge market moves and it indicates that market hast lost momentum and is consolidating before making new move. This market state can last from weeks to months and even years. These volatile ranges often develop other volatile ranges within themselves. If you look at the chart of gbp/nzd pair below you will see what a volatile market range looks like. 

You can clearly see how after sharp move down the pair started consolidating and moved into a prolonged big range with smaller sub-ranges inside. I like comparing this kind of price action with an elevator in a three-four store building. The elevator has very limited space to travel in a building of such size and it can change its’ location very fast by going from the first to the third floor and then back.

You can see price blocks that could be compared to building floors and see how price travels within our ‘price building’ or stays at the same floor for prolonged period of time. 

The way to trade these ranges

As you may see the ranges during these periods of choppy price action are quite small. gbp/nzd pair is very volatile and makes big moves and yet it can stay within 200 pip range for a few weeks, then move to another range of 200 pip width and then back to previous range. So, how do you trade that?

Firstly, you need to wait and become sure what the size of the range is. You look at the chart and see price past action. In a real life situation you may not be sure where the bottom or top of the range is if it has just started to form a new range. After any significant trend is over wait for the security to form a range. That is: wait for it to make a top and a bottom of the range. Only then, when the price visits these places for the second time you trade REVERSALS. If you have been reading this blog long enough you have probably noticed how I love trading reversals. This is especially true about trading volatile range. There is not enough ‘meat to chew on’ as range is very small, so you get the most by selling at the top of the range and buying on the bottom of it. 

Let’s walk through some trades

From price action we may see that the pair made a top and a bottom of the range from 14th to 19th of February (2013). On the 19th it visited the bottom of the range for the second time and made a reversal. This was the first possibility to buy. A big bullish 4 hour candle at the bottom gave us a clue that buyers started stepping in and we bought at the break of two 4 hour candle charts at 1.8248 level with a stop below the low of the day and exited at previous top at 1.8390 (ten pips before even number).
The price made a reversal there and we placed a sell stop order below the bearish 4 hour candle at 1.8342 with a stop above the high of the day and exited at previous low of 1.8160 or at 1.8210 (ten pips above the even number).  

Then price proceeded to break the floor and made the bottom for another floor 1.7954. It then quickly returned to the previous floor and hit the ceiling of the top floor again. It made a few attempts to break it, but failed. If you had traded the price action purely technically you would have lost on the first attempt to go down on the 26-27th of February, but if you had waited till fundamentals came out you would have skipped the above mentioned dates and traded GDP of British pound and made a successful trade by selling Pound again below 1.8339 level with a stop above day’s high and closed your trade at 1.8210 after four days. You see how the price lingered for a few days and only then collapsed by reaching the floor again. Trading these ranges requires a lot of patience. Choppy price action might get on the nerves of any trader. 

On the 1st of March the pair made a reversal at the floor and started rising, but failed to reach previous top. So, either you would have exited with some profits at an even number at 1.8290 (ten pips below even number( entry point 1.8232 with a stop loss 1.8166) or you could have pushed your stop at break even and got neither profit, nor loss from this trade. 

Then for about two weeks the pair got stuck between two floors until it made to the ground floor (from past perspective (we know that it was not ground floor now)) again. It formed a cluster of candles (that indicates a reversal) and broke upwards back to the top floor. A break of the floor could have been a good possibility to enter the market and come back to the ceiling of the floor. So, a buy stop at 1.8170 with a stop 1.8052 and the target of 1.8390 would have been an excellent trade. 

Do your own homework

The pair then again made two attempts to break the level and failed. I do not want to continue telling how you could have traded these as now you can pretty much figure that for yourself. Do your homework, analysis and design the best ways how you could trade these situations in the future. When the same market conditions appear you will be equipped to make an intelligent guess and smart trade. You will make mistakes along the way, but practice makes perfect. So, continue analyzing the right side of the chart (the first one) trying to find best entry, stop loss and take profit areas for your trades. You won’t believe how much you will learn by simply doing this. People fail to trade successfully not because they do not have any strategy, but they tend to be reactive rather than proactive. You need to be ready before things start happening rather than reacting to what is happening. Daily analysis (maybe even writing a trading journal) would help you a lot to become a proactive trader who plans his trades and executes as well as manages them with sound discipline. 


Trading volatile range requires: establishing high and low of the range, trading reversals at both ends when market price action confirms a reversal (bullish and bearish candles, 123 reversal patterns and fundamental news releases), setting stops above high (if selling) and below the low (if buying) of the day market reaches the top or bottom of the range. Your target always is the other end of the range (if buying you go to the top (resistance) , if selling you go to the bottom (support)). Do not forget that market can slip through current range and set new one. Be flexible and watch what happens when market reaches its’ freshly made bottom or top. Finally, plan your trades and trade your plan. This is how you will become a pro using any kind of trading system. 

Ok, time to finish! I have covered all market states and finally finished my series. Next time I am going to tell you how to select best candidates for your trades. I wrote somewhat on the topic, but I want to deal with the theme exclusively, so that you could learn to choose the best pairs that have the highest potential to move strongly.  

I hope you benefited from the post. 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. 

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