How to Trade Trending and Rangeing Markets

Written by admin on May 7th, 2012

Article by Michael Cobbson

The first step towards professional trading, whether it is in Forex, Stocks or Commodities, is learning to separate between trending and ranging periods. It is known that the markets trend only 20% of the time and in the rest they move in ranges, without a clear sense of direction. This is why it is crucial that you learn to separate these two conditions, and alter your trading style for each of these conditions.

The most reliable method to identify ranges and trends is to measure the strength of trend. To measure that we use the moving average, or more specifically, the 20-period moving average. If the moving average is flat, it means that the trend is weak and that market is in a range. If the moving average points up or down, it means that the market is in a trend and you should only take trend-following signals.

In ranging markets you should only trade reversals, enter long trades on the support level of the range and enter short trades on resistance. The biggest mistakes traders make is to trade trend-following indicators in ranges. Do not use the MACD, Alligator or Moving Average cross in range periods. Instead, use reversal indicators like the CCI, RSI and Stochastics in ranging markets for maximum accuracy. Do not trade breakouts or pullbacks in ranging markets as they do not profit as well and the drawdowns of such strategy will be higher.

In trending markets we recommend trading all the classical indicators, and trade breakouts and pullbacks for maximum accuracy. These techniques will improve your trading and make your signals much more reliable when you alter your trading style and optimize it with the current market condition. You can spot the range boundaries using the Bollinger Bands indicator, that show you the lower and upper boundaries of the range that limit price, and you can use it to enter trades right on the limits.

Another method you can use to spot range and trends is the CCI Indicator. When the CCI Indicator value is close to 0 or fluctuates near it, it means that price is in a range and when CCI is in an extreme value it means that the trend is strong and price is in an extreme value. However, we recommend using the moving average method as this is the more accurate method of analysis and has been used by traders for decades to spot these market conditions.

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