$50
3 pips
$50
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The debate over range versus trend trading strategies has adherents on both sides in the forex market, and both strategies have been proven to work extremely well for some people. The old market saying: “The trend is your friend,” describes the general mindset for trend trading, while range trading can be more suitable for shorter-term traders who like to “buy low and sell high.”
Trend Traders
Trend traders typically have a trading style where they first identify a particular trend in a currency pair after a reversal. They then look to subsequently liquidate the position either before the end of the move, or just after it ends and reverses slightly. Accordingly, the trend trader will wait for the next price reversal and will follow price movements closely using different technical indicators to alert them of a pending reversal in price direction.
Once identified, the trend generally needs to be confirmed before taking a position. Upon confirmation, a short or long position is established in the direction of the trend along with orders to liquidate the position at pre-determined profit and risk levels.
Once identified, the trend generally needs to be confirmed before taking a position. Upon confirmation, a short or long position is established in the direction of the trend along with orders to liquidate the position at pre-determined profit and risk levels.
Often, trend traders will manage their risk by cutting losses and reducing the size of their trades during periods of high volatility in the market. While trend trading is a popular forex trading strategy and many people use it successfully, it is not for everyone.
Furthermore, in the online forex market, money deposited in brokerage accounts can often be leveraged at 100:1 which means with $1 you control $100. Using this sort of leverage, trend traders can make a good deal of money quickly if they catch the right timing on a substantial market trend. Nevertheless, trends can fail and trading on the wrong side of what looked like a trend can be a costly venture with that kind of hefty leverage.
Range Traders
In contrast, range traders typically look for non-directional markets that are forming consolidation patterns. As the name implies, their trading style involves trading within a particular price range.
Generally, they will add to long positions at the lower end of the range and increase short positions at the higher end of the range. They will then take profits as the market approaches the opposite side of the range.
A range trader’s view on the market is that regardless of where the rate is headed, it is bound to return and trade at the same price eventually. Typically, a range trader will prefer to start with an initial trade and then might add to that position if they see a better rate using a “doubling up” strategy.
For example, the range trader might start by shorting Cable or GBP/USD at 1.5000 and then continue shorting it at intervals of 0.0050, until the rate reaches 1.5250. When Cable subsequently returns to 1.5000, the trader covers the entire position for a profit.
Trading in this fashion could be extremely capital-intensive however, and would require deep pockets in order to trade comfortably. A solution to this dilemma is that in forex, many retail forex dealers offer mini-lots of 10,000 units instead of the customary 100,000.
This makes each pip worth $1 instead of $10 and can substantially relieve the pressure of laying out large amounts of money in margin calls to maintain an underwater position. Basically, by correctly sizing trading units, a trader can range trade with a smaller amount of money and a lower level of risk.
The Importance of Discipline and Your Trading Plan
While both strategies differ considerably in style, the forex market can accommodate both systems depending on the particulars and parameters of the trading system implemented.
Furthermore, trading style takes second seat in terms of importance when compared to having discipline and a sound trading plan. Either strategy can work for a disciplined trader with a well-defined system. The key seems to be sticking to a trading plan that works and adhering strictly to any planned stop-losses.
Basically, irrespective of whether you use range versus trend trading strategies, having success when trading depends on your skill in knowing how to plan your trade and your discipline when you trade your plan.
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