I’ve heard a senior trader in an interview once say that the market would often range more than it would trend. I’m not sure if this is true, but granting it is true, then this is probably the reason why many traders lose money trading the markets.
Why? Because my hunch is that there are more trend following and momentum trading traders and strategies than there are range trading strategies. And many of them only have one trading system to trade on the markets. Imagine using a momentum strategy when in fact the market is ranging. Chances are things wouldn’t work out well. You’ll be finding yourself just entering a trade thinking that a momentum play is going to happen, and just as you entered, the next candle reverses, hits your stop loss, and goes to the other end of the range.
Even seasoned traders fall victim to this. We see the chart being neutral. No market structure is showing a range yet. So, we enter our trades based on whatever strategy we are using at the time. Then as we enter the trade, it reverses and touches the other end of a swing low or high. Then we realize the market has formed a range.
This is because the markets are not exact and ranges are hard to spot. And even if we spot a range, we are often a little too late. Often, we see more than a couple of touches each on the support and resistance before we call it a range. Just as we see three or four touches on each side and realize it is a range, ready to pull out our range trading strategies, the range gets broken on the fourth or fifth touch of the support or resistance.
Why is this? Supply and demand traders might have the answer for this. This is because resistances are basically a supply of ready sellers or short traders at a given price area. And supports are also demand zones of buyers ready to buy at a certain price area. The first visit to that price level, whether a demand or supply zone, these traders will enter in. The next visit, those who were not able to get in on the first touch would also come in. But the more price visits the area, the lesser the supply or demand will be because they’re already in the market. As soon as the either a supply or demand runs out, the range is broken.
Knowing how to identify a range is good but learning to anticipate a range forming even before it “officially” becomes a range is far better.
To do this, we must first understand what most traders would call a range. Many traders would define a range as a market structure with a perpendicular horizontal support and resistance areas, with more than two touches on each side.
Knowing what we know how other traders think of a range, the strategy is to enter the market as a range even before other traders decide it is a range and stop trading it as a range as soon as it becomes a mature range.
How do we do this? We wait for a range with a couple of touches on either a support or resistance and still no defined horizontal support or resistance on the opposite side, but only a swing low or swing high.
The Setup: How to Trade Ranges Based on Zones
Anticipate a range with two touches on the resistance zone and a swing low
Mark the area anticipated to be the support zone from the body of the candle forming the swing low up to a few pips below the wick of the candle
Wait for price to revisit the support zone then watch the price action as it touches it
As price enters the support zone, enter a pending Buy Stop Order a few pips above the support zone
Note: Price shouldn’t stall in the support zone. The candle after the touch of the support zone should immediately close above the support zone.
Stop Loss: Stop loss should be a few pips below the support zone.
Take Profit: Target take profit should be a few pips below the resistance zone.
Anticipate a range with two touches on the support zone and a swing high
Mark the area anticipated to be the resistance zone from the body of the candle forming the swing high up to a few pips above the wick of the candle
Wait for price to revisit the resistance zone then watch the price action as it touches it
As price enters the resistance zone, enter a pending Sell Stop Order a few pips below the resistance zone
Note: Price shouldn’t stall in the resistance zone. The candle after the touch of the resistance zone should immediately close below the resistance zone.
Stop Loss: Stop loss should be a few pips above the resistance zone.
Take Profit: Target take profit should be a few pips above the support zone.
As said earlier, ranges are quite hard to trade. We often trade a different strategy aside from a range trading strategy, prior to the market forming a ranging structure. Then, as we notice the range, we trade a ranging setup just before the range gets broken. I think the key to trading ranges is anticipation, and this strategy helps us trade ranges by anticipating it ahead of the market noticing a range.
Knowing this, many variations could be done using this knowledge. Some supply and demand traders use pending Limit Entry Orders prior to price touching the zone. There are advantages and disadvantages to this. One is that sometimes the market moves too fast, and if we only trade every candle close we might be a little too late to enter the trade. By using Limit Entry Orders, we are able to enter the market at a good price compared to waiting for the close. On the other hand, Limit Entry Orders could also be risky since price could sometimes pierce through the zones before reversing. Some also wait for the candle close before entering the trade. This would be on the safer side, but it also causes traders to enter a little too late, diminishing the Reward-Risk Ratio. Sometimes, price also bounces strongly, the opposite zone is reached with just one candle, just like our sell setup.
Variations and tweaking could be done, but the key to success trading zone based ranges is anticipation.
How to install Zone Based Range Forex Trading Strategy?
Download Zone Based Range Forex Trading Strategy.zip
Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
Copy tpl file (Template) to your Metatrader Directory / templates /
Start or restart your Metatrader Client
Select Chart and Timeframe where you want to test your forex system
Right click on your trading chart and hover on “Template”
Move right to select Zone Based Range Forex Trading Strategy
You will see Zone Based Range Forex Trading Strategy is available on your Chart