Home, Home on the Range

If you've watched the forex markets for any length of time you've probably noticed that they spend an awful lot of time in ranging activity, ping-ponging back and forth between support and resistance levels without breaking above or below them. So if you've come to forex expecting high drama every day, it's a good idea to adjust your expectations and get as comfortable with range-based trading as you are with the trend-following strategies that are often assumed to be the most profitable. Because if you have a trend-oriented mindset and keep looking for price breakouts that don't materialize, you're going to be (a) disappointed and frustrated (b) losing more money than you make.

Advantages of knowing the likely trading range and trading within it are:

• You'll tend to place more conservative, higher-probability trades.
• You'll have a realistic sense of where to place your stop-losses and limit orders.
• You'll be able to make money from the kinds of whipsaws that could otherwise prove very costly.
• You won't be as bored by ranging price behavior because you'll accept it and even expect it as a normal state of the markets.

Here's a chart of some ranging activity from the week of March 21-26 that could've proved challenging to the trend-following trader and profitable for the ranging strategist. Looks kind of like a giant, week-long whipsaw, doesn't it? Depending on your trading mindset, this could be a very pretty or a very nerve-wracking picture:

Of course, forex markets do move in trends as well as ranges, and being able to switch to a trend-based strategy quickly will be a key factor in developing a consistently profitable trading system. Let's say you currently have a range-oriented trade in progress, and all indicators are suddenly pointing to an emerging trend. What do you do? First off, if you're on the wrong side of the trade, don't panic - the best strategy may be the simplest, just letting your current trade end however it's going to end based on your original parameters, and then place your next trade based on the new market conditions.

If you're lucky enough to be on the right side of the trade and you've got a limit order placed at a point of likely resistance (and it hasn't been hit yet) move it outward in regular increments in the direction of the trend, thereby increasing your potential profits. You'll also want to move your stop-loss up, maybe even setting it at the break-even point so at the very least you won't lose money. Also consider switching to a trailing stop-loss that will follow the new trend up as far as it goes, locking in profits all the way.

And after that? Be ready to shift back to your range-based trading strategy. Following a dramatic market trend you'll often find yourself back home on the range - and that's not necessarily a bad thing.