The Trending and Ranging FX Rates Market

Posted by admin 05/02/2014 Comments are off 450 views

FX Rates Trend and Range

This article looks at the trend and range FX rates markets.

One of the most important things a trader must know when entering the foreign exchange market is how to differentiate between a trending and a ranging FX rates market.  This is vital as different trading strategies are required for the different market conditions.  If you use the incorrect strategy in a certain condition, your trading will be affected negative and you will experience losses.

What is a FX rates trending market?

A trending market can be seen when there is high volume activity on the foreign exchange ‘floor.’  The majority of trading is usually conducted during this time as trending markets show high liquidity.  Contrary to popular belief, this happens only 20% of the time therefore it is important you are able to correctly identify these conditions.

When a market is trending one will see a distinct price movement in one direction over either a short or prolonged period of time.  However, these short trends do not always appear in trending markets but can be part of a range.  The trends are identified using forex charts, the most popular being an MACD histogram.  This not only provides an indication of the trend, but also the strength of the presenting trend; the stronger the trend the greater the chance of a trending market condition.

How do I trade on the trending market?

The majority of forex traders will utilise the trending market, with day and swing traders being the most common.  The continued price movements in a single direction will allow individuals to make a profit as long as they follow a trend. Long-term traders will do best to avoid the trending market as their stop orders may be met or they could face a margin call.

However, trend trading can be very risky and you need to ensure that the trend will continue long enough for you to make a profit.  Many traders will enter a trending trade too late to incur any profit whatsoever.

What is an FX rates ranging market?

Ranging markets are basically an FX rates market that does not show a trend; however, this is not always true as some ranges do present with minor market movements which can be viewed as very small and short trends.  The best way to describe a range market is one where price movements do not fluctuate greatly and generally returns to their central price.  This market is evident for approximately 80% of all trading time.

The ranging market can be identified using long-term timeframe forex charts.  These charts are used as their pattern is stable and suited to the ranging condition.  Simple moving averages can also be used to identify a ranging condition.

How do I trade on the ranging market?

Long-term or positions traders and carry traders are those best suited to this type of market condition.  Ranging is beneficial to these individuals as it allows for a slow build-up of profits over a prolonged period of time.  The carry trader will not have to worry about margin calls or stops being hit due to lack of market movement.  It should be noted that some short-term scalpers make profits off the small price movements in the ranging market.

 

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