It is not difficult to spot a range in a price chart – even for a beginner. In most financial charts, there are obvious areas where the price seems to follow what looks like a predictable path.
These are ranges, and they come in a whole variety of flavors.
Traders like ranges because they do one thing: reduce uncertainty.
This article covers the most common types of ranges in Forex markets and how to trade them.
Range Trading: The Basics
The basic way to trade ranges is to enter (or exit) near to the range boundaries. That means selling when the price is at the top of the range and buying when it is at the bottom. The top of the range provides a resistance area to price rises and the bottom a support area for price falls. Figure 1 below shows an example of a horizontal range or box channel in which a typical range runs along a pair of parallel lines.
As with all trading systems, success lies in attention to detail and correct execution of the technique.
Let’s look at some typical range trading scenarios
With a horizontal range the price moves sideways within a parallel band known as a box channel. These kinds of ranges are common at all time scales, though they are not as commonplace as trending ranges or arc ranges (see below). It is easy to spot horizontal ranges on the chart either visually or with indicators. The horizontal range typically shows:
- A flattening of the moving average lines
- Peaks and troughs lying within a horizontal band
- An oscillation of the price between the top and bottom area of the band
Figure 2 below shows an example of a horizontal box channel. The black line shows the 200-period moving average.
The bottom indicator in Figure 2 is the MACD indicator. The MACD histogram line (shown in black) crossing downwards through the signal line (orange) indicates a sell signal. An upward crossing through the signal line indicates a buy. The height of the MACD line indicates the level to which the price is overbought or oversold.
Indicators like MACD are useful if you are using automation. The ATR (average true range), RSI and standard moving averages are also helpful. There are also some specialized tools available for automated trading. However, when range trading don’t over rely on indicators. A visual inspection of the chart is often as reliable if not more so. Line drawing tools found in most charting packages are also useful.
Another common chart pattern in Forex is the diagonal range. In this configuration, the price ascends or descends within a sloping channel. This can be a box, but pennants are also common where the lines are at an angle.
Diagonal ranges can extend over very long periods, sometimes years. These are of course trends but in reality, most of the short duration trading opportunities will happen within the ranges that develop within the trend. Diagonal ranges also crop up frequently on hourly and minute charts where the range slope can run with or against the main trend over longer timeframes.
The main thing to note with the diagonal range (and pennants) is that breakouts nearly always happen in the opposite direction to the range itself. In an upward sloping range, the most likely break is to the downside. In a downward sloping range, the most likely break is on the upside. This is not a cast iron guarantee by any means, but it is a useful rule of thumb.
Figure 3 below illustrates this. When the downside break happens, the price moves 150 pips within a short space of time, giving back nearly all of the gains that the upward trend made.
Figure 4 shows the same pattern but in reverse. Here a downward sloping range sees a powerful upside breakout. These examples also exemplify how the price often “pulls back” to the moving average (pink line). These kinds of range breaks towards the moving average show typical price behavior around ranges.
Breakouts in the direction of the range do happen but often the price will return to the original trend. This kind of temporary break usually happens on important news releases. They are a result of trigger trades which happen when news traders and automated programs enter on the first response to a data release. Often though, the market has already absorbed the news prior to the release so the move “fades” as the consensus view of the market reestablishes itself. The price then reverts to its original track.
Figure 5 shows an example of a breakout of a diagonal range in the direction of the range itself. This happened during an announcement by the US Federal Reserve. The price does fall back within the range shortly after making a break of some 300 pips upwards.
For the reasons above, depending on the range slope and the currency pair, you may prefer to trade one direction or another, rather than trading both ways.
When the direction is against the predominant trend, the range is establishing as a bearish rally. With these, it is best to trade against the direction of the range itself, and into the direction of the predominant trend. So let’s say the weekly trend is firmly downwards but an upward range is forming on the hourly chart. Figure 3 shows a typical setup. In this case, it is best to trade the top side to the bottom side of the range. Trying to catch small upward strokes is not worth the risk of a downward breakout unless you have some fundamental reason for trading that side.
With most ranges, the structure is not entirely obvious on first sight. In such formations, the price movements take place around an invisible central pivot axis with support and resistance areas forming around it. Tools such as pivot grids, Bollinger bands and moving averages are useful in marking out these ranges and identifying where the support and resistance areas are.
Some traders prefer to trade these kinds of ranges towards the central pivot axis rather than at the extremes. In this way, they aim to trade out extremes of price on the assumption that it will revert to a mean (the central pivot axis). For more on this technique see this article on pivot trading.
With this strategy, you use a smaller profit target and seek to capture the price movements as the price pushes towards the central axis of the range.
As mentioned above once the price hits the range wall, the chance of breakout (or partial which hits a stop loss) is always there. Therefore, by trading at the edges of the range the trader is relying on the price turning successfully in their favor. By definition at a pivot point, the direction is ambiguous. By trading the central area, you can reduce the risks of turns at the edges of the range.
Short Duration Ranges
Fleeting ranges often form in sub hourly charts because of technical conditions or simply the flow of minor news events through the day. The challenge with trading these kinds of transient ranges is that they often “evaporate” as soon as they are noticeable. This happens because of over trading and because the only thing supporting the range is speculative day traders not real money. It is usual for transient ranges to break once they hit support or resistance at a higher level.
This makes trading “shorter lived” ranges challenging. The basic rule is that the longer the range has been in place, the more robust it is.
When trading on the lower charts it is always worthwhile to move up one or two timeframes to check for support and resistances that might affect the range you are trading.
Trading method for ranges
In most situations, the price movements in a range cluster within the center band. Setting your entry and profit target away from the extremities improves the chance of reaching your profit target. It also increases the number of tradable opportunities that you will have. The downside though is that it will reduce your potential profits on each trade.
The basic approach to trading a range is:
- Wait for the price to reverse at the boundary or at about 2/3ds from the boundary of the wall. You will usually see consolidation around these levels before a reversal takes place.
- Confirm the move with at least two candles that mark the direction away from the boundary and towards the center of the range.
- The price often turns before the support/resistance so set the take profit (TP) level no more than 2/3rds of span of the range.
- Set the stop loss well clear of the range boundary to allow for failed breaks. The ATR signal is useful in deciding a stop loss, as are support and resistance zones (as well as those at higher timescales).
Beware of setups that look “too obvious”. If something looks too good to be true it probably is; if the range looks like a sure thing it could be due a breakout at any moment.
Once you have done the analysis and entered the position, leave it to run its course.
Handling Range Breakouts
One of the complications of range trading is that breaks out of the range are rarely clean and decisive. The price will often break then descend back into the range one or more times before the dominant direction is clear. There are indicators available for handling and detecting range breakouts.
Do not try to “chase the price” on a breakout. Range breakouts can be very forceful and will take your profits along with them. If you are caught the wrong side of the move, it is best to cut the loss and wait for another entry opportunity.
Likewise, do not to try to trade back towards the range after a breakout. If you see the price retracing, unless there is some fundamental reason, do not assume the original trend will re-establish itself. With well-established ranges, several retests of the boundary are common before a full breakout. Use the retest as an exit opportunity.
For this reason, it is better to avoid the trade when a break looks possible even if the price moves firmly back inside the range. This margin of error means giving up some profit, but it leads to fewer loss trades.