Should You Be Trading Trend or Range?
Traders must decide whether to trade trend or range regardless of whether they are trading stocks, futures, options, or foreign exchange. And they respond to this query by evaluating the price environment; appropriately doing so significantly raises a trader's likelihood of success. Two separate price characteristics, trend and range, need for essentially diametrically opposing mentalities and financial management strategies. Thankfully, the FX market is specially designed to support both approaches, giving trend and range traders possibilities for success. Let's first look at how trend traders can profit from FX since trend trading is significantly more prevalent.
Trend
Which trend is it? Higher lows in an uptrend and lower highs in a downtrend serve as the simplest indicators of trend direction. Trend is sometimes described as a departure from a range as shown by Bollinger Band® "bands." Others define a trend as when prices are restrained by a 20-period simple moving average with an upward or downward slope (SMA).
Get In Early
Regardless of how it is defined, trend trading's objective is always the same: get in early and maintain the position until the trend turns. The trend trader's basic mentality is "I am right or I am out." All trend traders implicitly wager that the price will move in the same direction. There is little motivation to maintain the trade if it doesn't. In order to make the best entry, trend traders frequently use tight stops and conduct numerous probative forays into the market.
Range
The direction doesn't matter to true range traders. Range trading's fundamental premise is that the currency will almost certainly turn around and head back in the same direction it started. In truth, range traders wager on the likelihood that prices would repeatedly trade through the same levels with the intention of profiting from such oscillations.
Range trading obviously calls for a whole different method of money management. Range traders prefer to be wrong at first in order to construct a trading position rather than searching for the ideal entry.
