Currency Trading for Beginners: Range Trading Strategyby Dave Woodhouse Active Trader
Range trading is a simple strategy that can be used on almost any financial product although this article is mainly directed to currency pair trading. Range trading is pretty much just as is sounds, find the range that a product regularly trades in, buy low sell high in the case of a long order and sell high buy back low with a short order.
Time scales in MT4
Proper use of the time scales will help you to figure out the current price trend of your currency pair or commodity. The first thing you need to do in range trading is to establish your range to trade. To do this you will need to look at multiple time scales. Be aware of the long term range from the W1(Weekly) and D1(Daily) scales but they may be too large to see the range you wish to trade. Look at the H4(4 hour) and H1(1 hour) scales to see the current trend of your product. Watch the M30(30 minute) and M15(15 minute) scales to see the recent trading range and more recent trend. The M5(5 minute) scale will show very recent range and trend while the M1(1 minute) scale is not really useful to show a range, but does show the almost immediate movements in value. This scale can be used to try to pin point a bottom or top in the range taking care not to make reactionary trading decisions based on this fast moving scale. Movements in this scale may seem dramatic, but typically do not reflect the greater trend.
Finding and Trading Your Range
Finding a good range to trade a financial product really depends on the product itself. Use the M15 through H4 scales to look for a repeating fluctuation in price that is enough to make a decent profit after covering your trading costs. Place long orders(buy) while in the bottom end of the range and short orders(sell) while in the top end. Always be aware of where the price is sitting on the D1 and W1 scales while placing orders in the shorter time scales. As short orders become profitable and get closed, look at whether or not you should be placing long orders for the next fluctuation in the positive direction and do the same as closing long orders for the hopefully coming negative price fluctuation. Be sure to leave enough free margin in your account to cover the full range that you are trading plus some as nobody likes a margin call. The indicators below will be very helpful when figuring out when to buy and sell in your range keeping in mind that the price dictates where the indicators move, not the other way around. You may find it easier and more comfortable to trade a product that you are somewhat familiar with like your home currency. Staying close to home will also keep your trading costs down and likely allow for more leverage.
The Stochastic Oscillator compares the price at which a security closed relative to the range of the price over a certain period of time using two lines. The first of the two lines is called %K representing closing price and the second %D represents a moving average of the closing price. The oscillator has a full range from 0 to 100. Leaving values set by default will be fine, but you should edit the indicator and set an upper level of 80 and a lower level of 20. When the oscillator goes over the level of 80, it is considered to be overbought. It is considered oversold when dropping below the level of 20. Generally, values will increase as the 80 level is breached and continue to rally while above this level. The oscillator leaving the overbought area and dropping back down below the 80 level is an indication that the price may have reached a ceiling and start to fall. The same concept holds true for when the oscillator drops below the 20 level into the oversold area which represents a declining value. A return above the 20 level suggests that the price may start to increase.
Relative Strength Index (RSI)
The Relative Strength Index is an oscillator that follows the value of the financial product being traded. The RSI oscillator has a full range from 0 to 100. It will most likely have a default 14 day period which is fine, but the indicator should be edited to include an upper level of 70 and a lower level of 30. When the RSI oscillator goes above the 70 level, it is overbought. It is oversold when dropping below the 30 level. A level of more than 70 may have a continued rally until the level turns downward and returns below 70 suggesting a possible end to the rally. A level of less than 30 may have a continued decline until the level rises and goes back above 30 suggesting a possible bottom.
Commodity Channel Index (CCI)
The Commodity Channel Index is a measurement of the amount of deviation between the current price of the financial product and the average price. This oscillator does not have a full range but is centered on a value of 0. When setting up CCI, the indicator needs to be edited to show a high level of +100 and a low level of -100. Between these two levels is a channel with 0 at the center representing the average price. A high level of CCI which would be considered to be anything above +100 means that the current price is high as compared to the average price for the product. A low level of CCI being anything below the level of -100 would be stating that the current price is low as compared to the average price.
Average Directional Movement Index (ADX)
This trend indicator is based on a 14 day period comparing two direction indicators, the positive direction indicator(+DI) and the negative direction indicator(-DI). The Average Directional Movement Index shows the strength of price movement while the positive direction indicator(+DI) and the negative direction indicator(-DI) show the direction of price movement.
A divergence occurs when and new high or low in price is not also a new high or low in the Stochastic Oscillator and/or Relative Strength Index. Value of the financial product may have a correction and follow in the direction of the RSI. To make this indication of a coming price drop stronger, look for the RSI level to drop below the level of the closest valley or low level. Divergence in CCI is much the same in that a new high price is not expressed as a new high level in the CCI suggesting a coming price correction.
News and Stats
While it is possible to trade on technical analysis alone, it is really only half of the story. A great deal of the fluctuation in value that you are tracking with the technical analysis was caused by the release of information, reports and statistics relevant to your product and the countries involved. Economic news releases from the relevant statistics agencies from your country are key to making good profits in currency pair trading just as financial reports and news updates are key to trading public company stocks. All statistics agencies have release calendars for important upcoming reports. For currency pairs, economic reports on GDP, trade balance, unemployent and income are a few critical reports that affect prices greatly. Find the agencies that release key economic numbers relevant to your product, bookmark them and be waiting anxiously minutes before their release. Find the analysts projections or forecasts on what the numbers should be before they are released. If the real numbers are better than the analysts forecast then prices will increase immediately just as they will decrease if expectations are not met as real numbers are released. For constantly updated news and statistics feeds from multiple sources organized by country of origin come to www.thesmartforex.com.
Consider using a practice account for any new trading strategies before risking your money. Foreign exchange products are highly leveraged and often very volatile. Never invest money that you cannot afford to lose!
Created on Nov 19th 2013 15:21. Viewed 328 times.