Trend Trading vs Range Trading
Range trading and trend following are essentially very different ways to trade the market. It is nearly impossible to range trade and trend trade the market with the same attitude and the same mindset. A different set of indicators and tools is needed and the methods for generating entry signals, placing stops and determining profit targets are also not identical.
This is why most traders prefer only one of those styles and usually stick to it throughout their trading careers.
However, that is not always the best way to go about trading. The Forex market is a 24-hour market that offers the opportunity to profit in both bull and bear markets – contrary to stocks or other markets.
If we wait for a trend to develop in order to take a trade we might have to wait for quite a while, and, in fact, also miss many other opportunities to make money in the periods when the market is not trending.
And let’s face it, the Forex market does spend much more time in ranges than in trends, so it pays to be able to trade these opportunities as well. The good news is that using a ranging and a trending strategy together is actually possible and achievable with some practice.
There is one basic principle of technical analysis to keep in mind whenever you are trading ranges or trends.
Some indicators are great at showing trends and work excellently during trending markets while others shine in a ranging market. Being profitable is always about using the appropriate methods and tools at the appropriate time.
In order to develop complete and balanced trading strategies as well to capture the maximum profit potential, it’s good to be able to trade both ranges and trends. Or if that seems difficult and counterintuitive, then at least you must be able to know when the market is in a range and when it is trending. The previous two articles, where we discussed range trading and trend trading separately, should give you good guidelines on how to do that.
So, let’s see what are the main options for being consistently profitable in Forex.
There are basically three paths you can take:
- Identify the state of the market and only trade in the preferred/suitable market.
- Identify the state of the market and switch between a trend following and a range trading system as appropriate.
- Simultaneously trade a trend following and a range trading system.
1. Trade only one strategy, either ranging or trend following
This is the approach that most traders prefer and is the recommended one for beginners and less experienced traders because it is simpler.
You still need to be able to determine if the market is trending or ranging, but you won’t be trading both. Instead, you will only trade the one market that suits you – either ranging or trending. By doing this a trader can really master his strategies and also profit handsomely when their moment of glory comes.
While this approach may include a lot of time in “waiting mode” and basically fishing for the right opportunities, it is definitely a simple and profitable one.
2. Switch between trend following and range trading
This approach involves using your judgment and analysis to determine the current state of the market and then using the appropriate strategy to trade it. In essence, you will be switching between range trading and trend following strategies constantly and try to profit from whatever the market offers you at the moment.
But remember, as we noted earlier in this article, you can’t trade both with the same mindset. In fact, you may feel like you have double personalities when you do this which is what makes this approach more advanced and difficult for less experienced traders.
After enough practice and experience though, using this approach can be quite rewarding, busy and fun.
3. Automate your Forex trading - Use a ranging and a trend-following system together
In essence, with this approach, you will run at least two different trading systems at the same time – one that is a trending following system and the other a range trading system in order to try to capitalize on all the opportunities in the market.
The downside to this approach is that by definition when one of the trading systems is profitable the other one will tend to be losing because of their contrarian designs. The basic idea is for the systems to complement each other and the one that makes money in the current state of the market to make more money than the other one which will most probably lose.
Unlike the first two approaches we discussed in this article, with this approach you won’t try to identify what state the market is in (although that is certainly beneficial anyway), but instead, you will shoot at whatever the market offers and try to make a net profit.
This is definitely an advanced trading approach that is most suitable for experienced traders. It’s worth mentioning that it will probably work best if it’s fully automated, like for example by using the so-called expert advisors or trading robots. Ultimately, to implement this plan you will first need an extensive and deep backtesting of the combined strategies before you can trust that they will produce net profitable results. The main goal here is to achieve less profitable but very consistent results.
Cracking the code of winning in both trending and ranging markets goes as far as cracking the code of being a long-term profitable trader. Many traders don’t understand how important is this and they fail to be consistently profitable over and over again. As soon as the type of market changes their trading systems that worked amazingly well yesterday suddenly stop working.
The market is of dynamic nature, it never rests and it always changes itself from trends to ranges. The current state of the market (or environment - either ranging or trending) is a crucial aspect to consider before taking any trade.