I previously warned you in a prior blog post on how to spot and avoid trading in a ranging market. Well, I know there are enough of you to take no heed to my advice and want to trade in a range market anyways. As such, I will provide my recommendations on what to do if you find yourself trading in a range market.
You will never know when you are in a ranging market until it has already begun. This is imperative to understand if you decide to trade my recommendation. While some of the principles can work in a trending market, you want to be sure you are in a ranging market to ensure profitability.
Weâ€™re going to forget all about indicators. To trade in a range, all we want to do is look for areas of support and resistance. To find such areas, simply look at the chart and spot out an area where price touched and bounced back from more than once. When the area of support/resistance has been discovered, place a horizontal line around that area. Do the same for where price has left and is now set to return to the original line you created.
Now what we want to look for is for when price re-enters that area of support and resistance. Once it starts to turn away, youâ€™ll want to enter into the market. Be sure to place a tight stop loss. You do not want this type of trade to run away from you. It could potentially be a breakout. And if that were to happen you will lose more pips than necessary.
Once the trade is moving in your direction shoot for at least a 1:2 risk reward ratio for profit. However, if you think you can get more, go for it.
The above picture shows two horizontal lines that are showing where price is bouncing back and forth. Though a trade would have been available after the second bounce from the top, it would not have necessarily been feasible to trade. At that time it was not yet confirmed that price is range bound. However, the following candles illustrate a ranging market. Price went down came back up, and then went down once more. This time it hit the area we had drawn for support. As such, it was time to enter the market.
As you can see, this would have created a nice tight stop loss with ample opportunity for one to profit as the price shot back up to the line of resistance. This trade would have paid off nicely for those who are willing to take advantage of some alternative methods to taking profit.
When making a determination if the market is trending or ranging, a good trading platform is a must. Personally, I prefer Metatrader 4 as it is user friendly and has a vast variety of tools that are of benefit to a trader. 4XP, an FX Trading Network recommended broker offers the Metatrader 4 platform. Download a demo today and see how this trading platform can be of financial benefit to you.