Written by Brendan Gunn, Sales Manager, GFT. What is range trading? And is this a way to make money on foreign exchange? What strategies do range traders use?
No, range trading doesn’t require you to use a laptop while you are in the saddle....it is a way of taking advantage of markets where a clear trend exists, and prices range up and down within a well-defined channel.
Range trading is a strategy that depends on selling highs and buying lows of a well-defined price channel on the charts.
The strategy typically works best in quiet non-volatile markets where prices meander aimlessly between clear levels of support and resistance. During range trading periods, indicators like Bollinger Bands tend to work well at identifying tops and bottoms and provide many opportunities for traders to book profitable trades.
Range trading however, can be a very dangerous strategy if traders do not employ reasonable stops. Once the range is broken to the upside or the downside, the momentum of the flow tends to create a massive trend move. This move might generate a huge drawdown for a range based trader and wipe out all of the previous profits harvested from selling channel highs and buying channel lows.
Success in range trading therefore depends not only on the ability to identify probable highs and lows, but also on the discipline of cutting one’s losses once the range boundaries are broken.
This is where different types of stop loss trading orders are invaluable.
A stop order closes a contract when the price reaches the specified point, enabling the trader to lock in a predetermined gain once the market reaches the designated point, or limit losses if the market moves against them rapidly and unexpectedly.
You might have a trailing stop linked to a contingent order. For example you might buy at $10 and set a trailing stop $2 below, at $8. If the price moves to your profit target of $15 the trailing stop will move up $2 beneath the market price and be removed once the parent stop order of $15 closes your trade. If the market goes against you before reaching your target and falls from $14 to $12, the trailing stop closes your trade, locking in the profit before the price falls further.
These risk control strategies do not eliminate risk, and a trader needs to be practiced in their use to take full advantage of them. One aspect to remember is to set stops and limits at realistic points, rather than regard them as last-ditch, fall-back positions. Don’t risk more than you are willing to lose.
Disclaimer: This article was written for informational purposes only, and is not intended to be used as advise. Trading is risky with or without the use of this information
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