The explosive and highly dynamic Forex market holds the lure for many seasoned as well as aspiring traders. Perhaps one of the many reasons for this is the hassle-free entry into the market. Moreover, the convenient availability of leverage, i.e. money to invest in FX adds to the charm of the market. However, risks in Forex trading is as high as well. Hence, to play the game in the FX market, strategies become a must.
However, having stated the importance of Forex trading strategies it is vital for a trader to understand the fact that strategies are never made in isolation. Kishore M, a known Forex expert says, “The market conditions and situations have a lot to do with how the Forex market pattern shows up on the charts and what kind of probabilities these situations or market conditions throw up’. Broadly stated, Forex is either trending or it is ranging. Trending would mean that the prices are moving in a particular direction in an upward or downward pattern and hence is said to be trending. Ranging is the reverse of a trending market.
Range bound market:
Here the prices fluctuate in between the trend lines. In other words, the prices in a range bound Forex market, is always in between the trend lines. The prices of a traded currency pair move till a specific high, which forms the resistance level and falls to a specific low, called the support level. Interestingly, in a range bound market, the resistance as well as the support levels remain unbreakable or trespassed by the price movements.
Such a market showcases highest of the high and lowest of the low price movement. These are long-term trends. As pointed out earlier, when the market trends it could be an uptrend, or a low trend. An uptrend will have higher highs and low and a downtrend will have lower highs and lows.
FX patterns in a Trending Market :
FX patterns are provided by the charts that are used by the traders to read the market trends. Kishore M, while stressing on the importance of pattern reading says, “With a pattern to chart the price movement, it becomes easier for the traders’ to spot a profitable position while it also helps in pinpointing to a stop loss and an exit point”. Two of the most commonly used patterns for trending market are the Head and Shoulders pattern also referred to as the H&S pattern and the Triangle pattern.
In this pattern, the charts have two shoulders and a head which form the topping formation and the downward formation. During an uptrend the prices will spike to a level which is the resistance level. It then falls to a high low which is the support level. The price does not fall below this and spikes again and reaches the same high or almost the same as the previous spike. This is an uptrend market. The inference here is that the prices will now rise.
The downtrend will showcase the same pattern in reverse. When the price drops to a low, it surges up again and falls back. The inference is that the prices will fall.
These are for short-term trading patterns. A triangle pattern forms when the price fluctuation in terms of highs and lows are frequent and in a chart, they actually end up merging at one point. These patterns can form in an ascending or descending or even in a symmetrical form. A triangle also indicates towards an entry, an exit and a stop loss point. The entry is usually the point where the perimeter of the triangle is broken in.
FX patterns in Rangebound market:
In this kind of a ranging market the prices move and fluctuate either up or down a rectangle. These patterns a can hold for years. Interestingly, in the shorter duration, the price breakouts occur in the opposite directions. In a channel range pattern, when the slope is upward inclined, the breakout will occur at the downside and vice a versa.
These are offshoots from the channel patterns. When channels of short duration form against the main trend, patterns like wedges, pennants and flags form. Since these are range bound patterns, a trader must remember that the price movement is not much or volatile. Since they provide the best bearish or bullish breakouts once the trends resume after fluctuations, these patterns are preferred to be traded on by the traders.
Post Forex trading reviews by experts, range trading has been found tricky by most. It is for the simplest of the reasons: the patterns for ranges are never clear. It is advised that a trader never trades with an obvious range set up in sight. Hence when trading a range,
- it is worth waiting for the price to reverse at the boundary
- use candlesticks to see the point where the candles come away from the boundary and turn towards the centre
- Stop loss orders must be engaged well clear of the boundary
The Forex market is an unpredictable roller coaster ride. With the fundamentals in place, at the end of the day, reading the charts and signals right is what gets the profits in. Trends and ranges are a part and parcel of the market. It is also a fact that more than a trend, the FX market witnesses range. Making the most of the prevailing market conditions comes with experience and learned skill.