Some Thoughts On Trading Range-Bound Markets

Is it possible to trade range-bound markets? The short answer is yes, but knowing the risks is important.
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We have a good question here from Gavin, saying that whenever we have a sideways bias or a neutral bias for a particular currency, or particularly currency pay or instrument, can we consider that as an opportunity from a technical point of view to trade it as a bounce or trade it as a bounce to the up side from the bottom end of the range and trade it as a sell trade from top end of the range?

Now Gavin, from a purely technical point of view, I mean that is something that you can consider doing. I mean something like the S&P 500’s been a good example of a range-bound mover.

This week, we did expect it to either pull back further or remain more range-bound in the run up to the FMC meeting that we have coming up today.

So given the fact that we are expecting at range-bound, you could for that reason trade it from the tops, selling it down and then buying it at the lows.

The challenge with trading anything that’s neutral or range-bound is that the normal reason why we’re not trading it as a trending move is because there’s no, there’s either no catalyst for it right there. So there’s either no immediate catalyst or sentiment that should be driving it up or down. And the other option that, apart from not having a catalyst, we might have two strong currencies versus each other for example, right?

So let’s go over to the currency space. Let’s open up, let’s take anyone, let’s the take the Aussie version of the US dollar. So in this week’s session from basically the eighth of June, we did expect either a pull back or a range-bound market on this in the run up to that , obviously the market’s looking to derisk before it. Not looking to take new positions until we get that FMC event which will be the main event for this week in terms of scheduled data points. So could you consider trading something like the Aussie US dollar in this type of range? Basically selling it at the highest, buying at the lows.

From a purely technical point of view, you can do it. We’re expecting it to remain more neutral and range-bound, but it really comes down to, it really comes down to what are you risking for the potential gain that you’re getting? So whenever we want to be trading, whenever we want to enter something, you would obviously want a very clear reason for why you’re entering a trade. You would to enter that trade with a clear catalyst, a clear plan in mind for why the market would want to be buying or selling it.

If you compare that to a range-bound market or a range-bound move, there’s really no incentive for the market to either buy or selling that pay. So yes you can consider buying high and selling low as long as you realize that it’s gonna be a very low conviction opportunity. So it’s gonna be low conviction, low probability. Because something, imagine this happening, right? So imagine it comes down to the bottom end of the range and you decide to take a stab at it down here, and let’s say you wanna keep a tight leash on it and you have a stop somewhere down here. And what happens is the market makes a run like yesterday. No catalyst, just profit taking and it slams right into that level.

So you take your entry and the market starts moving up and you’re like okay, it’s a range-bound move, it’s okay. And suddenly right at this low, you get a catalyst. Something, you know, Donald Trump coming out and saying that he’s gonna have some sort of retaliatory action against China. Boom, it suddenly breaks through that support zone and now you’re very very close to your stop and suddenly it gets taken out.

Okay, so you lose the trade. Only to see the markets basically, you know, negate the statement because it is a range-bound market, they’re waiting for FMC. Now sudden you get a candle that looks like that. You break through the level, your stop gets taken out, and now it moves up. So now you’re like okay, surely now the range is gonna hold.

So you enter another position, you place your stop down here, and you’re like okay, it’s surely gonna go up now. And now suddenly, even through the market has a range-bound bias, it just starts to meander around this level, it’s not really doing anything. It’s going a little bit up, little bit down. So you’re in a out of profit the whole time. And suddenly you’re an hour away from FMC, what do you do? Do you close that position? Do you remove your stop? There’s so many things that can go wrong with that FMC decision that can just cause you to take another loss in the trade.

So the point I’m trying to make with this illustration is just that you can surely trade it from the tops to the down side and from the bottom to the up if we have a range-bound expectation as long as you know that it’s gonna be very low quality, low probability, low conviction trades, and that won’t have a very high success rate.

Then of course, you know, if you keep your risk very low you can try and trade it. But I would prefer trading something where the market has a particular reason for wanting to trade it either up or down.

Remember it’s much easier to trade trending move than it is a sideways move, right? And you can get really chopped up in the short term from range-bound markets.

So trading something that is expected to be trending is obviously gonna be a lot easier from a technical point of view at least, you know, getting in at good spots and getting out at good ones as well.

So just keep that in mind. It’s obviously every trade is prerogative on the way that they wanna trade something like a range-bound market, just as long as you understand what the risks are of trading in that type of environment.

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