RANGE TRADER'S DELIGHT: CURRENCIES, COMMODITIES, & STOCK INDICES CONTINUE TO TRADE IN MOSTLY HORIZONTAL CHANNELS
Worldwide Stock Markets Drop, then Stabilize, Join Currencies and Commodities Horizontal Range Trading Mode. Finding, Entering & Exiting Trades at Reliable Support and Resistance Appears to Be the Key for Now, As Markets Wait for Coming News for Direction.
1. Introduction: Trading Ranges for Low Risk, High Reward
While action junkies love lots of volatility, those of us who actually trade to make money love it when instruments stay within clear channels or ranges, because these situations create potential low risk, high reward trades that even relative beginners can spot.
A. Here Are the Basic Steps:
You just need to do the following.
Identify likely support and resistance levels within the time frame of your choice.
1. Place your order near one of these levels
2. If you think the overall trend is up, then:
a. Place a buy order near (a bit below or above, depending on when you suspect prices will turn) the low end of the channel/trading range, otherwise known as support.
b. Place a sell order near the specific price top or “ceiling” (aka resistance) of that range. Instead of setting a specific sell price, you can set a trailing stop that automatically sells out your position when prices retreat by a certain amount or percentage. Each kind of sell order has its advantages and disadvantages
3. If you think the overall trend is down, then do the above in reverse. Place a sell order near that anticipated “ceiling” and a buy order to close the position near the bottom of the range that appears to be the near term support level.
B. Clear Trading Ranges Make it Easy to Keep Your Losses Small, Let Your Profits Run
Relatively clear support / resistance levels make it easy to set your stop losses relatively close to your entry point, (which you ALWAYS do, right?) after your position opens, and thus KEEP YOUR LOSS RISK LOW. If your get in near your chosen support/resistance level, and that level is breached, you know right away that your theory was wrong and your nearby stop loss(which you ALREADY SET when you entered the position so there is no emotional struggle to close the trade) takes you out of the position with only a small loss. If you’re right, a trailing stop loss can keep you in the trade and let you ride it for most of its gain.
C. Example: The EUR/GBP Pair
See the Currencies section below for a classic example from the past week of how even beginner traders could make low risk high reward trades.
The past week was full of potentially low risk high reward range trading opportunities, as major currency pairs mostly traded in clear ranges over the past days, mostly in flat, horizontal channels.
Note the below 30 minute EUR/GBP chart. A trader watching this pair on hourly or 30 minute charts could have easily noted by late afternoon (GMT) on 6/17 that the pair had a possible support level around 0.8500, and might have put in a buy order on the pair with a stop loss around 0.8470 for maximum likely loss of 30 pips (a pip= 0.0001) or 0.35%. Using a trailing sell stop of 30 pips, from 07:30 to around 9:00am GMT on 6/18, the trader could have made about 1% in just 90 minutes as the pair rose above 0.8600. Assuming the 30 pip trailing stop closed the position around 0.8587, our trader profited with a very conservative a 1:3 risk reward ratio.
EUR/GBP presents clear support/resistance for low risk high yield potential trade (Chart courtesy of AVAFX.com)
After watching the pair trade for a few more hours, our trader could easily have decided the move had run its course and was ready to test support around 0.8500. By setting a sell order on the pair around 0.8580, again with a trailing stop of 30 pips, this sell stop would have kept the trader in the move down until it rebounded at around 0.8479 around 11am GMT on 6/19, an over 100 pip move (over 1%).
Note there was no mention here of arcane oscillators or other bits of high end technical analysis alchemy. The tools were just basic observation of support and resistance levels, and disciplined use of stop losses to protect us when we are wrong.
Given that 200:1 leverage is common in Forex trading, a $5000 investment would control 1,000,000 units of currency, resulting in an approximately $10,000 dollar move in each direction, with potential loss of just $3k for each trade.
Yes, that leverage can DEFINITELY cut against you as well. That’s why we ALWAYS use stop losses, and try not to enter trades that don’t show us a likely exit point 3x the distance of a reasonable stop loss.
The point is, with a range-bound currency market, you don’t need any special education or resources to trade profitably, just diligence, discipline, and a bit of education on the basics of trading and technical analysis.
For those needing an introduction or review, there are many good, free online resources. For example, visit www.avafx.com , select “Resources” and then Educational Center. In addition, there are free courses and ebooks too. Many forex trading sites offer variations on these, at times with free customer support via live chat and toll-free phone support.
Note too, that the above example was far from an isolated case. Wednesday and Thursday also saw some equally playable moves in other currency pairs. For example, check out the USD/JPY Chart below.
USD/JPY 30 Minute Chart (courtesy AVAFX.com)
Now class, who can tell me what support/resistance levels they would use? Put your hand down, Miss Granger. How about you, Mr. Potter? Mr. Longbottom?
World Stock Markets Also Stick to Tight Trading Ranges
If you follow US stock markets, then you have a good picture of what happened worldwide, as virtually all major international indexes followed mostly the same pattern. After flattening out into tight trading ranges over the past week, stocks dove in on Monday and Tuesday, and then spend the week stabilizing at newfound support or making partial recoveries on low volume. As I’ve noted in recent articles (see http://www.avafx.com/analysis/ ), investors are waiting for further evidence to justify the 20-30% gains in stocks worldwide since March. Will there really be that kind of growth in jobs or earnings?
Unemployment in the U.S. is already pushing 10%, well beyond the supposedly conservative 8.9% unemployment rate used in the bank stress tests. For all the whining by the BRICs recently about the U.S. dollar, these countries desperately need the U.S. and European consumers. Not only will they thus continue to buy Treasury bonds and other developed world debt to fund that consumption, they will also be watching the related stock markets for signs about likely demand for their exports.
As with currencies, the near term ranges present trading opportunities for the traders. Buy and hold investors must be very careful.
Crude oil remains in its recent $68-$72 range, and appears headed towards its second day of mild gains following bullish inventory data from the U.S. and China. Gold was mostly flat, staying well within recent ranges after having pulled back.
Like currencies, both have been in trading ranges and have offered chances to take positions at support or resistance levels as traders watch the equity markets and other indicators for signs about the direction of the world economy. Further signs of deterioration could pressure industrial commodities like crude on fears of declining demand, and dispel near term inflation worries, which could further pressure gold.
Like other markets, commodities are waiting for some news for hints of direction.
Next week is relatively light on planned economic announcements, or earnings though with trouble in Iran and Nigeria, the energy producer’s keep to their role as geopolitical wildcards, who could always do something to give crude another whack to the upside.
If you don’t like quiet, hang on. We’re about a month away from Q2 earnings announcements from the banks. As the source of both the current crisis and the recent stock rally and optimism, these results could once again move markets. Big time.
5. Conclusion, Disclosure & More Info
Disclosure: I have positions in most of the above mentioned investments.
Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit http://highdividendstocksguide.blogspot.com
Markets are all interrelated! To keep up on currencies, commodities, and international stock markets in just a few minutes a day, visit http://www.avafx.com/analysis/ and get the big picture on world markets.