In the past several months, we’ve seen plenty of medium-term trading ranges form on most of the major currency pairs. When this occurs, forex traders go into range trading mode. On the key EUR/USD pair, for instance, price has ascended in a general uptrend for quite some time now, but in doing so it has moved from horizontal range to horizontal range.

The most tradable ranges are bounded by two horizontal lines (but they can also be slightly-sloped parallel lines), and have enough height in pips to make trading them worthwhile from a risk:reward perspective. Usually, two approximately equal touches of a price level on top and two alternating touches of a price level on the bottom create a potentially tradable range. Sometimes, though, traders may anticipate a range by just waiting for two touches of a top/bottom and only one touch on the other side of the range.

Within a horizontal range, traders will often draw diagonal intra-range trend lines, and then trade breakouts/breakdowns of these trendlines. This can be one of the most advantageous methods of range trading. Although it gets the trader in a bit late on the turn, it provides a higher probability confirmation that the turn indeed took place. Beyond the intra-range trendline breaks, range traders will also use oscillators (like Stochastics, RSI, CCI, or similar) to confirm overbought/oversold conditions, and therefore possible impending turns.

When the forex market is experiencing prolonged ranging conditions, which it often does, range trading can be the most logical approach to tackling the currency markets.

- James

James Chen is the Chief Technical Analyst at FX Solutions, a leading Forex broker. He is also a registered Commodity Trading Advisor (CTA) and a Chartered Market Technician (CMT) Level 3 candidate. At FX Solutions, Mr. Chen writes daily currency analysis, conducts forex trading seminars, and has authored numerous articles on currency trading and technical analysis for major financial publications. His upcoming book, Essentials of Foreign Exchange Trading (John Wiley & Sons), will be released in early 2009.