Three Effective Strategies for Ranging Markets in FX

In the FX, it’s often said that ‘range-bound markets make up 70%.’

This means that there are many range-bound markets.
In such a scenario, if you don’t have strategies for trading in range-bound markets, you might feel like you’re ‘missing out on profits.

From my personal perspective, I don’t necessarily agree with this, but it’s still valuable to have effective strategies for conquering range-bound markets.

So, in this article, I will share my thoughts on effective strategies for trading in range-bound markets.

Simple Contrarian Strategy

One of the most famous techniques in ranging markets is a simple reversal strategy.

For example, in the chart image below, you would buy at the yellow circle and sell at the light blue circle.

In a ranging market, the price tends to stay within a specific range, forming what looks like a box. This makes a simple counter-trend strategy quite effective.

Moreover, the profit-taking levels for this strategy are as follows:

– For buying: At the upper limit of the range.
– For selling: At the lower limit of the range.

The stop-loss levels are also defined:

– For buying: If the price breaks below the lower limit of the range.
– For selling: If the price breaks above the upper limit of the range.

These predefined levels make this simple counter-trend strategy very user-friendly.

Therefore, if you don’t have established trading rules, this counter-trend strategy can be a good choice.

However, while this strategy is user-friendly, it often encounters fakeouts.
This is because at the upper and lower limits of the range, there’s a clash between people who want to:

– Break the range.
– Contain the price within the upper and lower limits of the range.

These conflicting interests can lead to volatile trading.

For example, let’s say you bought at the lower limit of the range and placed a stop-loss just below that limit. At times, the price broke below the lower limit and triggered your stop-loss.
However, the price could swiftly surge upwards after your stop-loss which was fakeout.

In such cases, you may find yourself stopped out with a loss, only to see the market move in the direction you initially anticipated, causing you to miss out on potential profits.

While this counter-trend strategy is simple and user-friendly, dealing with fakeouts can be challenging.

Counter-trend strategy in a trend

This is currently in a ranging market, but it can be an effective strategy when looking at the bigger picture with a trend in place.

For example, it’s a scenario where you would enter the trade at the yellow circle in the chart image below.

Personally, for me, when it comes to strategy in ranging markets, this strategy has the highest win rate and is the most profitable, so it’s user-friendly.

First, if you look closely at the chart at this moment, the overall trend is uptrend.

This means that in the overall market sentiment,

“There are more people who want to buy than sell.”

However, because it has been rising one-sidedly, a correction has occurred, leading to a ranging market.

In this ranging state, it’s a situation where,

“It’s a ranging market, but the overall trend is upward.”

So, in general, it’s easier for buying to come into play.

Therefore, in such times, as I mentioned earlier, entering with the simple counter-trend strategy can result in a high success rate.

Furthermore, in this scenario, since it’s an upward trend, the probability of breaking above the upper limit of the range is higher than in a typical ranging market.

As a result, it’s also possible to extend profits significantly.

And, even so, the stop-loss is placed just below the lower limit of the range, which can result in a significant risk-reward ratio in your favor.

In this example, I showed you how this strategy works in a ranging market during an uptrend, but the same principle applies when trading in a ranging market during a downtrend, of course.

However, with this strategy, it can be challenging to execute trades like

“Buying at the lower limit of the range and selling at the upper limit.”

This is because in this case, when viewed on a larger scale, there is a clear trend in place, and the market participants’ focus is oriented in one direction.

Therefore, making profits on both the buy and sell sides becomes more difficult.

For example, in the previous example, where the overall trend is upward, entering a short position at the upper limit of the range is likely to result in a breakout, potentially leading to a stop-loss.

Hence, when using this strategy, it becomes difficult to sell at the upper limit of the range right after taking profit for buying. This makes the trading opportunities less frequent.

In other words, it’s more effective to trade in the direction of the prevailing trend. In practice.

A strategy that aims range breaks (high difficulty).

In ranging markets, there is an effective strategy known as range breakout trading.

Typically, when talking about range breakout strategies, aiming to enter trades after the price breaks above or below the lower or upper limit of the range.

With the traditional approach of trading range breakouts, there is a relatively high likelihood of encountering fakeouts, making it less reliable in practice.

However, the strategy I’m going to introduce here involves entering trades at points similar to what’s shown in the chart image below.

In essence, you read the signs of a breakout and enter a trade ahead of time. By doing so, you can get larger profit compared to regular range breakouts.

So, how can you enter a trade at such a point?

It involves closely observing the price action after it reaches the upper limit of the range.

For example, in this chart, after the price reached the upper limit, it retraced slightly, but it didn’t drop significantly.

Normally, when the price reaches the upper limit of the range, there should be profit-taking for buyers and counter-trend selling, leading to a potential drop.

However, when there’s no significant drop and the price remains near the upper limit of the range, it implies that

“There are few sellers, so there’s a high probability of an upward move.”

Therefore, when you see such price action, you can enter a trade before the breakout of the upper limit of the range.

Additionally, when a range breakout occurs, there’s an upward trend within the range.

In a typical range, the price movement often exhibits a more pronounced zigzag pattern with broader fluctuations at random.

Hence, when using this range breakout strategy, being able to assess:

– The price action leading up to the range.
– The price action at the upper and lower limits of the range.

If you can make these judgments, it can result in a significantly high success rate. However, with this strategy, chart-reading skills that enable you to assess these two aspects are necessary.

As a result, this method becomes somewhat advanced, and if you can’t read charts effectively, it might lead to more losses instead.

After a range breakout is most reliable.

In the above, I’ve shared what I consider to be an effective strategy for trading in ranging markets.

However, based on my experience, the most reliable approach in ranging markets is still to target pullback buying or retracement selling after the range has been broken.

The reason for this is that when the range is broken, it aligns the consciousness of market participants.

For example, in the chart image below, you can see that the range has broken to the upside.

This change in market dynamics results in a shift from the previous state where:

– Buyers: 50
– Sellers: 50

to a new state where:

– Buyers: 80
– Sellers: 20

This means that aiming for buying positions significantly increases both the win rate and the potential for profits.

Furthermore, based on my experience, after a range breakout, there is a high probability of a retracement.

The previous upper and lower limits of the range now transform into support and resistance levels, respectively, making the price likely to bounce off these levels.

This phenomenon is commonly known as a support and resistance reversal.

So, rather than forcing trades within a range, it’s generally more effective to target opportunities after a range breakout. The win rate is higher, and the potential for profit is greater.

Personally, I, too, aim for buying pullbacks or selling on retracements after a range breakout, and I tend to avoid trading within the range.

Summary

The strategies I introduced in this article are all methods I have found to be effective based on my experience. However, to make them work, thorough testing and training are essential.

Therefore, if you plan to use any of these methods, it’s advisable to first validate and practice them on your own.