Trend is a blog about global daily, weekly, monthly and yearly market trends in such financial markets as Forex, stocks and commodities as well as various day, swing and Forex trading strategies and ways to invest your money. In the blog I am going to share what happens in these markets on a daily basis. I hope you will enjoy my trend analysis. Welcome to my blog.
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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. BECOME A POPULAR INVESTOR ON eTORO NOW
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.
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.
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
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.
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
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.
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.