Trading Ranges in the Forex Market

When I started my trading education, I often read and was taught by the "trading gurus" that there are only 3 market movements. -- Up Trends, Down Trends, and Rangebound or Sideways. While I took this lesson pretty well, I couldn't fully reconcile what was being promoted as gospel that in the forex market, price action is 80% of the time "rangebound". What I have learned through the trenches though is farther from the standard text book explanation and a whole lot simpler than anything else. Let me explain.

Try opening a chart, any chart, what do you see? Chances are you see a movement up (up trend) or a movement down (down trend) and not really a sideways movement (horizontal). I then said to myself, well this must be the 20% of the time. Problem is it's been 3 years and all I could see is the 20% What am I missing?

Well, there was an "Aha" moment for me. It's actually quite simple really, you see the mistake happened at the very beginning when the terms "Rangebound" was used synonymously with "sideways". Let me say right now, they are NOT the same. You see when the markets are moving Sideways, the price moves down to a certain same "horizontal" lower area about 2 to 4 times and up to a certain "horizontal" upper area about 2 to 4 times. I lead myself to believe that this price action was the only acceptable definition of "Rangebound" - It is not. You see the simple truth is, all market movements whether it's an Up Trend, Down Trend or Sideways Trend are ALL Rangebound.

Let's take a look at an Up trend. The price action in an uptrend basically moves up diagonally in a "zig-zag" manner. If you look at it there are peaks (high points) and valleys (low points) But since it's moving up, the next high point is higher than the previous high, while the next low point is higher than the previous low. Now if we were to connect all the low points by a straight line we would form what we call a Trend Support line. Now if we were to connect all the high points by a straight line we would form what we call a Trend Resistance Line. Usually the support and the resistance lines are parallel to each other. Drawn together, the support and the resistance line forms what we call a Channel. Now, the channel is effectively the "Range" of the uptrend movement, meaning when the price touches the lower line (support), it will usually "bounce" this line and eventually go up to the upper line (resistance). And when the price reaches the resistance line it will usually "fail" to break this line and eventually go back down to the support line. -- Now this movement contained within the channel, this is the RANGEBOUND Movement that Happens 80% of the time. The same holds true for a Down trend. You can still connect the high points with a straight line and the low points as well and together they also form a channel which more or less contains the price action. The only difference is that the "Rangebound" price action is going down instead of up.

What about the Sideways or Horizontal price movement? Well this is also Rangebound. In fact this is what most "self-learners" think of as the "exclusive" owner of the term "rangebound".

So remember, an up trend or a down trend that supposedly was only to happen 20% of the time is actually the Rangebound action that happens 8% of the time.

So how then do you trade the range? Simple, ever hear of the mantra: "Buy Low, Sell High"? Well for an Uptrend, this is exactly how you trade the range. The Trend Support Line Represents the "Low" while the Trend Resistance line represents the "High". Buy when the price "bounces" support (buy low) then Sell when the price touches Resistance (sell high). For a Downtrend, the mantra is simply reversed: "Sell High, Buy Low" Sell when the price "Fails" (to break) the resistance line and buy it back when the price "bounces" support.