The other popular Forex trading strategy (aside from Forex trend trading) is Forex range-bound trading. “Range” refers to the price spread of a financial instrument (in this case, a currency pair) between highest and lowest points, over a defined period. Range-bound Forex traders typically identify currencies which are being traded in channels (as well as those channels themselves). The trick is to sell at the top, and buy at the bottom of the channel.
So, what is Forex range-bound trading?
Forex range-bound trading is a strategy that involves identifying and exploiting the channels through which currency pairs are being traded. A Forex trader with an innate understanding of range-bound trading strategy will acquire currency near the bottom boundary of the channel (where prices are low due to lower support level) and sell that very currency near the top boundary of the channel at much higher prices (where prices are higher due to higher support level). Once currency pairs leave this trading range – and they inevitably do, in the end – there is a huge movement in terms of price. This can either be a very good or a very bad thing for the (unsuspecting) Forex trader. The direction of this price movement typically coincides with the direction in which the price broke through the range – if the upper end of the channel was broken, the price will surge up; if the bottom was breached, it will plummet. The upper and lower boundaries are identified by observing price movements of a currency pair over a period of time. The high points represent the top end, while the low points represent the bottom.
The underlying principle
The underlying principle behind range-bound Forex trading is that every currency trades in loops, which means they are bound to return to the initial position eventually. The more times this actually happens in real life, the more rewards range-bound Forex traders will reap. If caught early, those rewards can be tremendous. In practice, range-bound traders treat price movement of a currency pair as a seesaw; they place upper (selling) and lower (buying) points and just let the money roll in. As if. In fact, a major downside to this strategy is the sheer amount of capital needed to conduct it and cover the losses – losses which are to be expected. Remember, range-bound Forex traders are betting that prices will return eventually, and still have to keep enough funds for running costs and stay patient – these things can take a while. This is why most of them rely on smaller lots and low commission from dealers. Finding a reliable broker is advantageous too because there reputable, experienced brokers offer daily market analysis that could help identifying support and resistance levels.
Forex range-bound trading is akin to Forex trend trading, in that both essentially rely on identifying and exploiting trends in Forex markets. Forex range-bound trading strategy is more complicated and time-consuming, but the profits it could yield in the long run more than make up for any troubles along the way – usually.