A Range Trading Strategy That Makes Breakout Part Of It
Sometimes, the market gets locked in a large trading range extending from 150 to 300 pips
. These large trading ranges get formed when central banks try to intervene in the foreign exchange market in order to stabilize their currencies within a certain range. This is done to boost exports or discourage imports.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.Now get ready for selling near the resistance level as the market nears that level. Switch to a smaller timeframe like the 30 minutes or 60 minutes chart and look for the bearish candlestick pattern like the Hanging Man to appear. Appearance of the Hanging Man is a signal that the uptrend is about to end and the prices are about to start falling or the market is about to take U turn. Go short once you get that signal.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.Again switch to a smaller timeframe like the 30 minutes or 60 minutes chart and wait for a bullish candlestick pattern like the Hammer to appear. Appearance of a Hammer signals that the market is about to take a U turn again. Once you spot the bullish candlestick pattern like the Hammer, go long.This simple range trading strategy has the beauty that in case if the bulls don't overcome the bears at the support, there is going to be no candlestick pattern to tell you that the price is going to reverse itself. So you don't have to fear when this happens and a breakout takes place. Breakout trading is highly profitable. Similarly if the bears don't overcome the bulls at the resistance, a breakout is going to take place and no candlestick pattern is going to appear telling you about the reversal in price action.
A Range Trading Strategy That Makes Breakout Part Of It
By: Ahmad Hassam
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