Hi all. Today the FX analyst noted in the analyst arena that despite months and months of ideal conditions for range trading, volatility has returned to the market making good range trading opportunities hard to find. I must admit I am finding this to be true as typical range pairs are breaking out in trends and not holding to their ranges. I’m going to test the waters a bit more, but may need to put this strategy back in my toolbox for awhile until the market changes again. Incidentally, this works both ways. Having a range and trend strategy gives you staying power in the market. Any thoughts on current conditions?
Hi all. It’s been thin for range trading, but FX Analyst snagged this gem some time back. I was slow to get on board and may have already missed the boat. In any case, I’m hoping this retraces one more time before making the plunge downward. I’ve set an entry order to go short at 1.6536 (FX analysts open was 1.6530 and has been called already). Stop is the same as FX Analyst’s at 6580. My target is 6486. I adjusted it higher than the analysts 6480 due to my spread.
As long as 6538 holds, this should be a solid trade. It has been well tested so far and stochs are in the overbought area. Moving averages are showing this still ranging with no signs of a breakout yet that I can see.
Hi tazmet, I’ve been reading and trying to follow your thread. Are you attempting to get in the trend before it begins?
Thanks,
Fx Diva
Hi FX Diva. Thank you for the question. First let me just say that I am a student of this style of trading and by no means a master. I am attempting to learn it and had hoped to learn more about it by posting my successes and failures on this thread.
But to answer your question, the idea is to exit a range strategy before it trends as a trend would make your range no longer valid. I had posted earlier that you can profit from these breakouts. So, in this instance, I guess I would be getting in the trend before it begins. In this case, I would be at the very beginning and the breakouts tend to be big.
I use a 3-filter simple moving average (65, 20, 7) to check for the presence of a strong trend. Depending on whether these are lined up or crossed can signal a trend or a range. But the key to this strategy is setting support and resistance via old-fashioned Fibonnaci, pivot points, etc. I have found these to be the key to any successful system.
FYI, it is a well-known fact that markets range most of the time. Traders who have mastered this style tend to be more consistent in their profits. I have said before that I believe it is a good idea to have a trend strategy and a range strategy. The basic idea of range trading is that no matter which way the currency goes, it will always return to its point of origin. Range traders don’t care about direction. The goal is to buy support and sell resistance. This is different from a trend, because a truly ranging pair will trade on the same levels many times and you can keep buying and selling on these levels making for a very lucrative strategy.
Picking the right Range is not always easy. You can view a chart and miss the obvious. FX Analyst (from analyst arena) had two losers so far this month. With 20/20 hindsight, it’s easy to see the mistake. I’ll be looking at what happened with EURCHF in my next post. I take the position that there is always a reason why a trade failed.
Finally, volatile markets wreak havoc on range traders. Since volatility has returned to the markets, it may be wise to put this strategy on the back burner until range conditions return. But since I’m a student and not risking real money, I’m keeping it up anyway.
As a recap. FX Analyst had recommended the following short-term range opp in the analyst arena:
Short entry order: 1.6530
Stop: 1.6580 (he did note it was not over the 5/21 spike high but here for money mgmt reasons. This didn’t make any difference as you will see below)
Target: 1.6480 or 50 pips
I decided to enter as well at about the same levels after reading his analysis. THIS WAS NOT A GOOD IDEA! Why?
The obvious reason is it resulted in a loss of 50 pips. By the way, a risk of 50 pips for a reward of 50 pips is not a very good risk/reward ratio to start with. That said, where did the analysis fail and how can this be avoided?
First lesson I learned, Check out the headline for a trading opportunity and first analyze it yourself. Then look at the analysts opinion. This can be enlightening. Otherwise, you will be tempted to see it from their perspective. Then you have two people possibly going the wrong direction.
Ok. So, if you look at the chart documented by FX analyst in the analyst arena on 6/8/07, he placed the range from 1.6415 - 1.6540. He also justified the entry due to a head and shoulders pattern. As a reminder, when it reaches the 2nd shoulder it is supposed to keep going down past the neckline. This did not happen, but the analyst felt the shoulder would eventually carry out. I should mention here that patterns are not normally part of a range traders toolbox and I would argue are less reliable than simply looking at support and resistance.
Now this shot way past FX Analysts range top of 1.6540 to 1.6598 and still climbing. Was it a trend breakout? I don’t think so. Why? I used the 3-filter MVA test to check for trend and they have not lined up. They are still showing a range pair. So, what I believe happened here is exactly what happened with the last pair FX Analyst analyzed AUDNZD. He picked a narrow range which was not a range at all but simply market noise. You even get this on the daily chart sometimes. I believe the true range is shown via the blue lines in the attached chart. I’m going to test this to see if I’m correct in just a moment and will be back with this board to place where I will be putting my entries, stops and target. I will also be placing a buy order above the range in case this breaks out.
As I said before, I don’t expect this pair to breakout. But it pays to be prepared. I’m going to wait until the close of the daily candle at 2pm before setting my range entry. The pair is already at what I would call the top of the range but I would like to see if it tests closer to the previous high of 1.6615. Also, waiting until after 2pm, I will avoid paying rollover interest should my order hit before two.
The breakout order is as follows:
Breakout Entry Order Long: 1.6645 (should cover testings of 1.6615)
Stop: 1.6615
Target: TBD (If it breaks out, I don’t want to limit my profit right away. I’ll check my chart first).
I can’t do this one guys. The daily candle closed outside of the range and the moving averages just came into line giving me an indication of a strong uptrend. Only the stochs appear to indicate overbought conditions. This may turn yet, but I don’t have enough information to make the trade.
Ok. I changed my mind. I want to test this out anyway. Besides, it only looks like the moving averages are lining up, but they haven’t quite yet. And, it is technically still in the range as long as it doesn’t exceed the test level high of 6613.
Ok. I’ve already entered at the following:
Entry Short: 1.6582
Stop: 1.6623
Target: 1.6471 (or about 111 pips)
Hi All. EURCHF is testing the resistance at 1.6613 and making me sweat a bit. It is currently right at 1.6613. As long as the range holds, we should see this drop yet but it is awfully close to my stop level. This is something I hopefully rarely do, but I am moving my stop to 1.6632. The reason is it would be a greater tragedy to get stopped out when it was merely testing the resistance line. Also, recall that I have placed a breakout long order at 1.6645. PS, I have hedging capability with my broker. Be careful placing opposite orders near each other if you do not as both your positions could be closed.
That said, I have added a new psychological weakness to my trading plan. It is simply that I don’t always follow my own advice. And, it is plain to see from these posts. I had pointed out earlier the necessity of sticking to my range. My range top was 6613, so why did I enter at 6582? I should have entered just below the top of the range or just above for testing if I was more aggressive. Yes, I may have missed a downward move, but no trade is better than a losing trade. Also, need I even mention how I had pointed out to take the wider range and yet I followed the FX Analyst by taking the narrow range.
Stay tuned to see if I sink or swim.
EURCHF blew past resistance at 1.6613 and therefore out of range reaching a high of 1.6634. 
Is this a range breakout?
As you can see from the attached chart, the moving averages have now lined up indicating a strong uptrend and stochs have taken an abrupt turn again upward. You may recall that I saw the beginnings of this before making the trade, but decided to barrel through anyway to test out my range top at 1.6613. Obviously, this was not a good idea. Now, if I was correct about the range top, then we are now in a breakout. But I would like to revisit whether or not this was the correct range top so that I can decide whether or not to keep my breakout order which was placed conservatively high up at 1.6645. Otherwise, we’ll see a triple-play disaster.
To answer this question, I went back to range trading school so to speak and picked up some tips from our friends in the stock world (FYI, Check out the attached link on range trading and the concept of triangle ranges Trading Range at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds..
In the case of a pair that has been trending upward, before going into a range, we first see a pair make a significant high and then a significant low. Then it tests the previous high (or doesn’t reach it at all) and proceeds back to the significant low but fails to break past it. Once this happens, we have a range. It is at the last point when it has returned to the significant low (or when it starts upward to be conservative) that I might place orders within the range. If you followed me there, then you already know the range I outlined was not a range because while it tested the previous high, it did not fail to break it. In fact, it blew by it. So, I jumped the gun in choosing the range.
What about FX analyst’s range? We had a significant high at 1.6613 and a significant low at 1.6444. It tested the previous high at 1.6549 and failed to break past it. Then it tested the previous low at 1.6422 and failed to break past it giving us a valid range. FX Analyst then recommended a short entry near his range top of 1.6549 as there was a head and shoulders pattern and he felt it would be dangerous to make a long entry. As you know, the long entry was the correct one. At the time, I felt he had simply picked a narrow range that might have been market noise. I felt it was still in a range and had not broken out because the moving averages were still crossed and had not lined up the way it usually does when indicating a trend. But these averages simply gave a delayed picture. They eventually did line up, but way past the breakout. FX Analyst’s range appears to be the only valid range in the group. This means the breakout occurred at 1.6549 and has already proceeded 95 pips. Entering my breakout order late may prove risky given my range is no longer valid. But I will keep it to test this breakout further until I see stochs begin to turn the other direction.
So in summary. The correct response to the failure of the first range trade using FX analyst’s range was to place a long order at the top of the range. The reason is it was a breakout in spite of the moving averages.
This experience has definitely helped me to modify my strategy for range trading. I want to take a look at the triangle ranges mentioned above in my next post.
Hi. I mentioned triangle ranges in my last post. Unfortunately, I couldn’t find a current example to post, but the previous link will give you an idea if you’re not familiar with it. Basically, regular ranges tend to stick to parallel channels while the triangle ranges proceed in a triangle or an arrow as I like to call it. Why do I care? Because, the great thing about a triangle range is it gives you a warning sign that the range is exhausting and a breakout is coming by getting narrower and narrower. With a parallel range, you must rely solely on the moving averages. So, as the triangle range gets narrower and narrower and your moving averages (or your favorite indicator) gives you an indication of the breakout direction, you can place your order near the top or bottom of the range at the right time to take advantage of these huge breakouts. Let’s hope one of these appears in the near future.
Tazmet, thanks for your journal postings. It has been helpful. How has this trading system done for the 2nd half of the year? Did you ever find the triangle ranges that you were looking for?
You have the best way of looking for range endings that I have seen so far.
Hope things are going well and you will have a fantastic 2008.
Prospector