Ranging or trending market Choose the right market for your strategy!

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In this article I want to share with you my thoughts about trending and ranging markets and give you some tips how to identify them and how to choose the best market condition for your strategy.

Here are my trades from 5/4 and 8/4. I had 5/6 ITM which is 85% performance. I am trying to avoid over trading.So, my goal is 3-4 solid trades every day.

Now, t’s time for our topic. Trending or Ranging market? Which is the best for your strategy? Let’s take a look to the first screenshot.It’s from EUR/GBP currency pair.

In this screenshot we have a trending market. You can easily see it from the general and bigger picture, the price is moving upwards or from the EMA’s (the 4 period EMA is above 8 period EMA). Notice that the price always makes new higher highs.We have for sure some pull backs but our resistances can’t stop the strength of the price. Look at the 8 period RSI. The price is moving between 70 level (the higher line) and level 55. It’s a clear up trend. Why is this happens? There are many reasons.Maybe some good news for Euro, maybe the price broke a strong past resistance but the fact is that if your strategy is trading reversals like I do in many cases this is not a good time for you. It’s very possible that the price will not make a reversal in the resistance and make a new higher high and you will be OTM. So, the best choice is to avoid trading reversals in a trending market. In this market condition you should trade and follow a strategy with the trend for being profitable.

Here is another screenshot from EUR/JPY currency pair and there are 2 trades of mine.

In this case we have a ranging market. There isn’t a strong trend, up or down, the moving in RSI is normal and the price is moving between two whole numbers which are our resistance and our support,too. There is a symmetrical channel here and you can take your trades for reversals with safe inside it. I took two ITM trades in the put arrows. In every case I was waiting for the price to touch the resistance and the next candle was negative. Notice my second trade in the second put arrow.The previous candle of my entry hit the resistance but we had a rejection in the same minute and the price was away from the reistance.The next candle was positive and closed in the resistance and I took an ITM put.

The same condition in this EUR/USD screenshot. It’s a ranging market and I took an ITM put when the price hit for the second time the same whole number. RSI for overbought/oversold is always my confirmation. MACD crossovers is another way you can use for extra confirmation,too.

Avoiding trading in ranging markets

The beginner strategy is a trend following trading strategy, i.e. it works better when the market is trending.

This is because if the market is trending, then your profit targets are more likely to get hit, so long as you trade in that direction.

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There is therefore an advantage to being able to identify when the market is trending and when it is ranging, because you can avoid ranging market conditions and reduce the likelihood of unprofitable trades by waiting for a price breakout.

This is called filtering, a way of avoiding certain market conditions to avoid unprofitable trades – in this case, avoiding ranging markets. Once you have identified a ranging market, then you can wait until the price breaks out of that range before you start to look for trades.

The chart below shows an example of the price breaking out of a range:

  1. The price is ranging
  2. Upper boundary of the range
  3. Price breaks through this range to the upside
  4. Price is in a trend

A price range has an upper and lower boundary

An effective method of determining a price range is to identify the upper and lower boundary and place support and resistance levels at them. Then when the price breaks out of the range you can begin to look for trading opportunities.

You can see in the chart below that the shaded area, shown at 1, is in a clear range between the resistance level, shown at 2, and the support level shown at 3. The price then breaks out of this range and enters into a trend, shown as 4.

  1. Ranging market
  2. Resistance level
  3. Support level
  4. Trending market

A hint to see if the market is ranging, is to look at the candlestick formations. If the candlesticks are unusually short and have long wicks, then this is further indication that neither the buyers nor the sellers are managing to gain momentum.

You can see in the chart above that the candles within the range highlighted in the shaded area 1, are distinctly smaller than those outside the range.

Applying range break out to the beginner strategy

To include this filter into the beginner strategy, you start by determining the direction on the 30 minute chart as per usual. Once you switch to the five minute chart, you refrain from looking for any new opportunities until the price breaks out of that range.

You should note that after the price has broken out of the range, you go through the whole process of looking for a setup. So, if the market direction is down, then after the price has broken out of the range, you must first look for a broken up fractal and then look for a broken down fractal to enter – and vice versa if the market direction is up.

To illustrate this, take a look at the chart below where we show the same example as above, but applied to the beginner strategy – in this situation, the market direction is down:

After the price has broken out of the range, you then look for the up fractal to be broken, shown as 1. Then you enter when the down fractal is broken, shown as orange 1.

You can filter trades using support and resistance

Sometimes the market will be ranging, but the range will not be the tight range that has been shown above. Sometimes there can be a reasonable enough distance between the upper and lower boundaries to enter trades in between.

If you identify an upper and lower boundary of a range, this means you can avoid trades if the entry is too close to the upper boundary for a long trade and too close to the lower boundary for a short trade.

To do this, you can look for the most recent support and resistance levels on the 5 minute chart. Take a look at the chart below:

You can see that there is a clear zone of support and resistance that you can use to filter your trades. You do not have to search for support and resistance levels on higher times frames, just the most recent support and resistance levels on the 5 minute time frame where you are looking to enter into a trade.

In the following example, we demonstrate how you can apply this to the beginner strategy – in this example the market direction is up.

The down fractal has been broken at 1 and using the traditional rules of the beginner strategy, the entry would have been at 2. However, it is very close to the resistance zone. Waiting for the price to break out of the range to the upside and then take an entry, shown as 3 gives you a better chance of a profitable trade.

Summary

So far you have learned that:

  • the beginner strategy is a trend following trading strategy and so there is a distinct advantage to be able to recognise when the market is not trending.
  • you can apply filters, ways to avoiding certain market conditions, such as ranging markets, to decrease the amount of unprofitable trades.
  • you can apply support and resistance levels to highlight a range, and then look for trading opportunities when the price has broken out of that range.
  • significantly smaller candles are also an indication that there is no momentum in either direction.
  • you can also filter trades by avoiding entries that are too close to a resistance level in a buying opportunity or too close to a support level in a selling opportunity.
  • instead you can wait until the price breaks out of the range before entering into the trade.

How to find the Right Currency Pair to Match Your Trading Strategy

One of the most important things in trading is picking the right currency pair, combined with the right trading strategy. Choosing correctly has the potential to make a huge profit, while choosing the wrong pair will lose money. This is one of the similarities that the forex market shares with the stocks market- except rather than trading individual stocks we’re trading currency pairs.

When you trade it is important to make your money work for you, As Kevin O’Leary says

There are three main things to consider when choosing your pair in the Forex market.

First, identify whether the pair is a trending or non-trending pair.
Second, figure out what type of strategy you will be trading.
Finally, you want to know the average true range of that pair (which means how much the pair moves on a day-to-day basis).
This article will explain in detail how to choose the perfect pair to trade for your specific trading style and strategy. We also have training on how to use currency strength for trading success.

Step one: Identify the Trend

The first thing you must do when choosing which pair to trade is to identify the trend. A trend is defined as the overall direction in which the market has moved in the recent past, for example, “the Aud/Usd has been in a downtrend for the past 6 months”. You can identify trends either by using trend lines or by applying moving averages (MA) to your charts. If the pair has not been trending, it will be important to take note of the sideways trend before you decide which pair to trade.

Step two: Pairing your Trend with the Trading Strategy

The next step to finding the right pair to trade is to make sure that those pairs fit the strategy you intend to trade. If you’re trading a trending strategy- your pairs must be trending pairs. If you try to trade a trending strategy on a pair that is sideways, you will have a losing strategy. If you have a trending strategy and you identify pairs that are trending, your chance of being a profitable trader goes up a great deal. Additionally, if you find a pair that has been moving sideways for a period of time it will be important that you choose a range trading or sideways market trading strategy to match up with those pairs. There are many strategies that you can apply for each different pair but it’s important that you know what the behavior of each pair is before you trade it. Many traders make the mistake of matching up the right pair to the wrong strategy.

Step Three: Noting the ATR

Average True Range (ATR) is the amount, on average, of movement in pips in a single day. ATR is important because if you don’t know how much a pair moves on average, it is much more likely that you will hit your stop loss. This is important when determining the pairs you want to trade based on your strategy and trading objectives. If you are an aggressive trader who is scalping and trying to make a high percentage gain in a short period of time, you will want to take special note of the pairs that have a high ATR because those can move a lot so you don’t want your stop loss too tight. Knowing the average true range of the currency pair and the strategy you’re planning to trade makes a huge difference in the success or failure of your trading.

Most traders overlook carefully selecting the currency pair…. https://t.co/LY8g53f8bj Read this Now. pic.twitter.com/VbJz6DfdoP

Most traders overlook carefully selecting the currency pair that they’re trading and believe that they can trade any pair with any strategy. This trading strategy is one of the main reasons that rookies lose money, so don’t make the same mistake of pairing the wrong pair/strategy. You’re now armed with the information to pick the right currency pair with the right strategy to enhance your trading. You can also read our winning news trading strategy.

Thank you for reading!

Please leave a comment below if you have any questions on How to find the Right Currency Pair!

Also, please give this strategy a 5 star if you enjoyed it!

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