- 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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Editors’ Picks
EUR/USD stays defensive below 1.1750 as USD finds its feet
EUR/USD kicks off the new week on a softer note, holding below 1.1750 in European trading on Monday. The pair faces challenges due to a pause in the US Dollar downtrend, with traders shifting their focus to the delayed US Nonfarm Payrolls and CPI data for fresh directives. The ECB policy decision is also eagerly awaited.
GBP/USD holds steady above 1.3350 as traders await key data and BoE
GBP/USD remains on the back foot above 1.3350 in the European session on Monday, though it lacks bearish conviction and holds above the key 200-day SMA support. The US Dollar holds its recovery mode ahead of key data releases, while the Pound Sterling faces headwinds from the expected BoE rate cut this week.
Japanese Yen adds to strong gains and drags USD/JPY to 155.00 amid hawkish BoJ bets
The Japanese Yen extends its steady intraday ascent through the Asian session on Monday, dragging the USD/JPY pair to the 155.00 psychological mark in the last hour. Against the backdrop of the recent shift in rhetoric from Bank of Japan Governor Kazuo Ueda, an improvement in business confidence reaffirms market bets for an imminent rate hike this week.
Editors’ Picks
EUR/USD stays defensive below 1.1750 as USD finds its feet
EUR/USD kicks off the new week on a softer note, holding below 1.1750 in European trading on Monday. The pair faces challenges due to a pause in the US Dollar downtrend, with traders shifting their focus to the delayed US Nonfarm Payrolls and CPI data for fresh directives. The ECB policy decision is also eagerly awaited.
GBP/USD holds steady above 1.3350 as traders await key data and BoE
GBP/USD remains on the back foot above 1.3350 in the European session on Monday, though it lacks bearish conviction and holds above the key 200-day SMA support. The US Dollar holds its recovery mode ahead of key data releases, while the Pound Sterling faces headwinds from the expected BoE rate cut this week.
Gold climbs to seven-week highs on Fed rate cut bets, safe-haven demand
Gold price rises to seven-week highs to near $4,350 during the early European trading hours on Monday. The precious metal extends its upside amid the prospect of interest rate cuts by the US Fed next year. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
Solana consolidates as spot ETF inflows near $1 billion signal institutional dip-buying
Solana price hovers above $131 at the time of writing on Monday, nearing the upper boundary of a falling wedge pattern, awaiting a decisive breakout. On the institutional side, demand for spot Solana Exchange-Traded Funds remained firm, pushing total assets under management to nearly $1 billion since launch.
Big week ends with big doubts
The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.
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