Why You Should Consider Range-Based Forex Trading Strategies
If you find trading trend-based strategies too risky, why not consider range-based forex trading strategies? Trading range means that you are buying or selling a currency that is moving within a specific price range for a specific period of time, and then making profits from the price oscillations. To illustrate how you can make money by trading range: let’s say you are trading the EUR/AUD currency pair, and the euro is at 1.4500 to the Australian dollar. Every time the exchange rate increases by 50 pips the trader shorts the euro and then buys it back when it moves down 25 pips. If the euro eventually reaches the 1.500 level, then the trader can potentially make a lot of money, particularly if the currency continues to bounce back and forth.
However, in order to effectively implement range-based forex trading strategies, the trader will have to use high rates of leverage, which exposes them to the possibility of high drawdowns if their positions move against them and the broker makes a margin call before they can recover. In order to avoid this, the trader can take advantage of the mini-lots many forex brokers now offer. While the typical forex lot is 100,000 units, a mini-lot is only around 10,000 units. This means that a trader risks less since each pip the currency moves up or down is now worth just $1 rather than $10. Hence, if you have $10,000 in your trading account, you can set your stop loss order at 200 pips over your entry price. In addition, range traders can also benefit from the fact that forex brokers do not charge commissions but instead take their profits from the bid-ask spreads of the currencies the trader is buying or selling. This means that traders will not suffer severe cuts in their profits when trading small lots because they have to pay prohibitively-high commissions.
To start running range-based forex trading strategies, you start by choosing which currency pair to trade. In a range-based strategy, the economies of the pair you choose should be closely related and the two countries the currencies represent should have a low interest rate differential between them. The best choices for range traders are the so-called currency crosses, which do not include the US dollar as part of the pair. The best currency pair to trade range, according to analysts, is the EUR/CHF since both regions enjoy similar growth rates as well as following fiscally-conservative financial policies.
Once you’ve decided which pair to focus on, you can chart their price movement in order to identify the range within which they are moving. You can identify this range by drawing support and resistance lines on your chart. To confirm the price range, use the MACD (moving average convergence divergence) indicator to spot possible price breakouts that could indicate the currency is moving out of the range. Range-based forex trading strategies are the best choice for traders who are not looking for big profits but are content with small earnings that accumulate over time.
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