It is important to have a handful of different techniques to trade under different conditions. Have a technique for when a currency showing a strong trend, as well as a range technique for when it is trading in a range. Ranges occur when the price moves up and down yet remains within established support and resistance as indicated by trendlines. The trend channel should be relatively flat. The best way to trade in a range is to go long when the price bounces off support or short when the price bounces off of resistance. Useful technical tools are Bollinger bands and stochastics.

First, to confirm you are in range the price must have touched and then turned back at least twice from support and resistance. The following graph is of a short term range over several hours. This range is only worth trading if you are a day trader, since from resistance to support is only about 45 pips.

Bollinger bands

Bollinger bands consist of a simple moving with two additional lines that are a certain number of standard deviations above and below. By default, the moving average line of the Bollinger bands is set at 20 period simple moving average. The primary use of Bollinger bands is to measure a currency pairs volatility, however, Bollinger bands can also be used to find out whether the price is overbought or oversold. If the price crosses the upper band, this indicates an overbought condition, and if it crosses the lower band, this indicates an oversold condition. Bollinger bands are very powerful technical tool and they are one of my favorite technical indicators.

Bollinger Squeeze

There is something known as the Bollinger squeeze which is very useful for determining if a curency pair is about to get very volatile. In the Forex market periods of low volatility are often followed by periods of high volatility. When the upper and lower bands of the Bollinger indicator close together, it is often a sign that a violent breakout is about to occur. In the chart below we see the Bollinger squeeze followed by a period of intense volatility, in this case the volatility lacks a clear direction and trades in a range.

Stochastics

Stochastics are a very useful oscillator that indicate overbought and oversold conditions. When the lines and stochastics indicator cross above an overbought threshold this indicates that there could soon be a turnaround in the price. The same for when the indicator crosses below an oversold threshold. These thresholds are indicated by lines in your stochastics meter at the bottom of the graph. What makes stochastics unique is that they come in several different types, such as fast, slow and full. You don't need to know these different types for now, but if you start to like the stochastics indicator then you should investigate its full capabilities. Notice on the graph how when the price reaches a certain height the stochastics indicates an overbought condition, and the price soon drops. Then once the price reaches an oversold condition indicated by the stochasitcs there is a nice rally.

Homework Trade:

Let's go back to that range chart. Say you were in the mood to make a quick day trade on this range, after confirming it is a range, you must measure the height of that range. In this case, the support is at 1.3840, and resistance is around 1.3885 a total range of 45 pips. Remember, the range must be worth trading, a range of 15 pips is not worth your time, a range of 100 pips is. The range on this graph falls inbetween and is an okay trade for a day trader.

Let's say the macro trend is an uptrend. When the price got close to your support line, you would use both Bollinger bands and stochastics to confirm that the price is oversold. Then wait for the price to test the support line and bounce off by 10% of the full range, in this case 4.5 pips but we'll round up to 5 pips. Our entry point on this graph would be at 1.3845.

Our profit target should be twice our stop loss, so we're looking for about 20 pips on this trade. We place our limit order to sell our pair at 1.3865.

If your currency is in a range try out this trade. Otherwise, go into the historic charts, find ranges and write out 5 full trades with entry points, stoplosses and profit points.