Big Moves After Narrowing Range

Markets have a few distinctive states that they fall into and stay till other state develops. One of the most popular ones is a range. Traders take advantage of that by trading support and resistance in a range. One of the best patterns in a range is a narrowing range. It may come in the form of a triangle or a rectangle. It will always end in a strong move. One can use it to make nice cash by simply placing buy stop orders above the most recent high and a sell stop below the most recent low. 

The example below of eur/usd pair clearly shows that. You may see how the pair went into a range mode after a strong move and in a period of three days stayed in a range. A catalyst for the breakout upwards occurred this Wednesday when FED came out with interest rate decision. US dollar collapsed across the board. The rally netted around 200 pips and the amount may increase if the pair keeps on rising the last day of the week. 

Remember, narrowing range is a good opportunity to take breakout trades and make a lot of pips as a result.

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Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice.

Range

Range trading is the topic of the post on the ‘Trend’ blog today. I am sure that most of you know what it is, but for those who don’t I would ask you to look at the chart below before I go on giving a definition of it and some of my thoughts about trading it. 

What is a range?

I hope that just by looking at the chart you could easily identify what a range in any security is. It is the high and low levels of a security that it stays within for a given period of time. Depending on the time frame it can be a few hours or a few years. After a prolonged trend securities usually lose steam and fall into ranges. In the beginning they are usually very broad. That’s when prices set the high and the low levels it will be trading in the nearest future. It then stays within the boundaries for some time, till they are broken and a new trend begins. 

How to trade a range?

When a high and a low established in a range, you trade reversals at those extreme points (support and resistance). When the price of a security approaches resistance you wait for opportunities to go short and when the price of a security approaches support you wait for opportunities to go long. As reversals happen near those important levels, when you see the price approaching them you have to be on alert. 

Things to look for before entering a trade in a range

What do you wait for? You wait for 123 patterns, head and shoulders patterns, clusters of candles, candle patterns that would indicate a reversal (dojis, engulfing candles and etc.) overbought and oversold signs on RSI and other indicators that are used in a range, divergences, a break of some important sma, such as 200 or 50, a break of a trend line, important news releases and many more. 

Eur/jpy example range trade on 4 hour chart

You can look at the same eur/jpy pair4 hour chart, in the same range that was shown on a daily chart before. You will see that on the 19^th of May 2009, the pair found support at the lower part of the range and broke into a swing upwards. After three weeks it peaked. However, you could have spotted those peaking signs. The first sign would have been RSI reaching a value of 70 (overbought level), then RSI showing divergence, then head and shoulders pattern formed and finally trendlines broken. At the break of the neckline of head and shoulders (I wrote on the topic yesterday) you would have gone short. 

You finally trade a breakout of a range

All ranges are finally broken and prices start trending again. You can prepare for that by placing buy stop orders above the upper part of the range and sell stop orders below the lower part of the range. When the range is finally broken you automatically enter a breakout trade and go with the trend (if the breakout is not false). 

Read my previous post:

Head and shoulders

Disclaimer

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.

Trend for 21st of March 2011

As I expected there is no significant trend in Forex market today. Mondays are usually pretty boring as there are no big moves. You can do some range trading, but ranges as you can see are very small, so you cannot make nice cash when market is in such state. Well, maybe you can if you have some super duper day trading strategy, but most day traders keep on losing their money, not making it.

Gbp/jpy is not going anywhere, although there are some attempts to break through most recent high of 132.50. Market is obviously lacking momentum today and no trend can develop without a momentum. There is some fundamental data from US coming in a few minutes, but I do not expect it to move markets significantly. I hope a trend will be in place tomorrow and we will be able to trade under better conditions. I am not including any chart today as I do not see anything interesting in the charts now. See you tomorrow. 

Read my previous posts:

Gbp/jpy range

Trend

Disclaimer

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.