Trading Style: How to find significant moves within range trading
|- Breakouts are exciting, but trading them is not always feasible.
- Trading within a range is more common, but offers fewer pips.
- Using overbought and oversold conditions can combine both worlds.
A user has asked: "I always have the sentence „the trend is ur friend“ in my head. You described the idea of mean-reversion. Does that mean to trade overbought and oversold situations (of any indicator)? And is it really a profitable way of trading?"
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When a financial asset is trending in a clear direction, it is better to trade with that trend than try to catch the occasional counter-trend. There is a better chance to make money when trading with the bigger move than with a smaller one.
When an asset is floating within a clear and limited range, traders tend to look for the big breakout, either to the upside – buy above the top of the range and sell even higher – or to the downside, by looking for the fall out of the range, selling the asset and covering even lower.
However, when an asset is trading in a range, it is often easier to trade that range. If the pair slides to the bottom, buy it, and wait for it to return to the middle of the range. If it is moving higher, sell it, and cover when that asset drifts back down to the middle.
While there are fewer pips in this method, it is often the better strategy when it is unclear assets where the price is going. Moreover, there are often many false breaks – looking at you EUR/USD – and therefore, it is often hard trading a breakout.
Now, what about overbought and oversold conditions? When a currency pair – or any other asset – trades in a wide range, it can hit overbought conditions when surging from the bottom of the range to the top. In that scenario, the case for selling the pair toward the middle of the range makes even more sense.
The same goes for the other way around – an extreme fall from the top to the bottom may send the asset to oversold conditions, thus adding to the case of making mean-reversion trading toward the middle.
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