The benefits of strong trends can be obvious. Strong trends are one of the many reasons that record-numbers of traders are flocking to the FX Market from other arenas such as stocks, or equity options.
When a currency pair like the Australian Dollar goes on a run as it did through and the first half of , the benefits to traders can be huge. Not only can a massive number of pips be racked up, but in a positive carry trade — traders can also earn rollover just for holding the position.
But it is an unfortunate truth that markets will not trend forever. Sometimes this amounts to a little congestion in the middle of an up or down trend; others this may be extended congestion while the market struggles to find a defined direction.
This article will walk through a simple mechanism by which traders can identify, and trade in ranges while focusing on what many traders to be the most important part of any approach: In Price Action Swings , we looked at a way that traders can identify inflection points in the market based on where price had traded before.
The benefits behind this can be huge. The following picture will show an assortment of swing highs and lows identified on an hourly chart: Notice that, on this hourly chart, there are quite a few swings back and forth. This exemplifies the fact that markets will often oscillate while trying to find an intrinsic value. When beginning to line up a range setup, the number of swings that might be available on the hourly chart may be too abundant.
So for this portion of analysis, the Daily chart may work better. Right off the bat, we can notice that price, of recent, has been caught within a range. The purple box below will show the period that I am referring to: Notice that since March the 5 th approximately 7 weeks before the publishing of this article , all prices in this currency pair have stayed within the box; with a low price of. This can be done on a shorter time-frame chart such as the 4 hour. This will allow us to take a closer look inside the range to plot possible buy and sell points.
After moving down to the 4 hour chart, we can look for groupings of swing lows around specific prices. The chart below will show the 4 hour setup of the same chart we were seeing above, with swing lows identified. As you can see above, there are multiple inflections within the box we had previously identified that will allow us to further identify support and resistance. While this chart has a lot of information on it that is key to setting up a trade, we can simplify this quite a bit more chart below: Notice that the prices we had identified collections of swing highs or lows previously is now identified on the chart, and is going to serve a very functional purpose in setting my game-plan for the currency pair.
We can illustrate that game-plan directly on the chart with what has already been given to us by the market. Since we have seen multiple iterations of price bouncing up at the price zone of. The chart below will illustrate: And now that we know exactly where our stops should be placed, we can accurately calculate how much potential risk we are taking on.
We can do the quick math. For us to enter, we have to feel confident in being able to gain at least 63 pips. By allowing my potential risk-reward setup to determine which trades I am taking, and which I am not taking, I am enabling myself to focus on high-probability setups. If price breaks lower, and takes out my stop — I can feel comfort in the fact that I may have saved myself a considerable amount of money as I closed the losing position before it continued to move against me and drain my account.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Price action and Macro. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event. Forex Economic Calendar A:More...