A Range Trading Strategy That Makes Breakout Part Of It

A Range Trading Strategy That Makes Breakout Part Of It

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How do large trading ranges get formed? Large trading ranges usually get formed when the central bank of a major economy in the world like the FED in US or the Japanese Central Bank (JCB) or the European Central Bank (ECB) decides to intervene in the foreign exchange market to stabilize its currency. When this happens, a large trading range might get formed in the market that might continue for weeks or even months. This trading range can be 150 to 300 pips wide. When this happens, you get a good opportunity to trade a large range!

First, you need to identify a trading range using an ADX (Average Directional Index). If the reading on the ADX chart is below 20, it means that the market is consolidating. You can further confirm it with the DMI (Directional Movement Index). After confirming that the market is in a consolidating phase and trading between a range of something like 150 to 300 pips, you are ready for applying this trading strategy. When the market rallies towards the resistance level, big players like the large banks and financial institutions enter the market and start selling aggressively creating more sellers than buyers. Consequently prices fall.

Similarly when the price action reaches the support, big players think that the currency pair is now oversold or underpriced, so they start buying. This buying pressure bounces the price action back again from the support and it starts to rise. What you will do is buy at the support and sell at the resistance. This is the essence of this range trading strategy. When the price action nears the resistance level, you are going to switch to the 30 minutes or 60 minutes chart. Wait for a bearish candlestick pattern like the Hanging Man to appear. This candlestick pattern only appears at the very top of the price action and once it has made an appearance it means that the price action is now going to start its downward movement. Go short when you find this candlestick pattern on the chart.

After doing that switch to the daily chart larger timeframe. Now wait for the price action to reach near the support. When the price action nears support, big players once again enter the market. This time they are bullish and think that the currency pair is underpriced. So they start buying the currency pair. This heavy buying makes the bulls prevail in the market and price action starts to move up again. The market is about to take a U turn.

So as the market approaches the support level again, you switch back to the 30 minutes or 60 minutes chart from the daily chart. Now, you should wait for the Bullish Candlestick Pattern to appear. This bullish candlestick pattern can be a Hammer. Hammer only appearing at the very bottom of the price action. After the appearance of a true hammer, price action reverses itself and starts to move up again.

This is a simple trading strategy that can be summarized by saying buy at the support and sell at the resistance. The beauty of this trading strategy lies in the fact that in case of a breakout taking place, there will be no candlestick pattern appearing telling you to buy or sell, this way you can trade the breakout as well. Trading a breakout can be highly profitable.


Copyright (c) 2010 C Tyler

About the Author:
Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE! . Know these Candlestick Patterns!



Article Originally Published On: http://www.articlesnatch.com


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