Range trading is simply finding a currency pair that has been moving between a defined level of support and a defined level of resistance for an extended period of time.
Once the setup has been identified, the trading plan is to buy at support and sell at resistance as long as the range remains intact.
Let’s take a look at the range on the historical 1 hour chart of the NZDCAD below…
In this straightforward scenario when price trades at support the trader would take a long position with a stop just below the lowest wick in the range. The limit (take profit) would be set at the top of the range and the trader would let the trade play out. If all goes according to plan and price trades up to the limit, a profit of 40 pips would be gained. If price retraces and take out the stop the trader would incur a loss of about 8-10 pips.
Now let’s take a look at a few trade management variations on this same trade…
Here we have the same trade set up but we are going to increase our likelihood of taking profit by moving our limit down slightly – a bit closer to our entry.
Here’s why this can work. Notice that price has hit the very top of the range four times. (This would be each time a candle body or wick touched or pierced the .8130 level.) On the other hand, price has touched our pierced our new take profit level a total of 15 times!
By doing this we will give up some profit if the pair does trade to the top of the range. However, we are increasing our odds of having our limit hit while still achieving a solid profit and having at least a 1:2 Risk Reward Ratio in place.
The choice is yours…
Take the chance of gaining more pips but with a lower probability of success or take the chance of gaining a few less pips but with a greater probability of success.
Now let’s take a look at the same set up but this time we will open two positions instead of one…
Personally, I like to trade multiple lots since it allows me more flexibility in my trade management.
Keep in mind, however, that anytime we increase our position size, we also increase our risk.
For example, if our stop is set at 10 pips, with one lot we are risking 10 pips; with with two lots we are risking 20 pips and so forth. To stay within our Money Management guidelines of never placing more than 5% of our trading account at risk, check to be sure that the trading account can handle the added risk.
When looking at the chart above, the set up remains the same but this time we would open our trade with two lots instead of one. (This strategy would remain the same whether we open two, six or ten lots.)
The flexibility that this allows is that we can close out one or a portion of the trade when price reaches the halfway point in the range. By doing that the trader locks in profit when that position is closed. Additionally, the stop at that point can be moved to breakeven , that price at which the trade was entered.
Now, if price retraces and hits our stop we are closed out of that portion of the position with no gain but no loss is incurred either. We also have the 20 pips from the first portion of the position locked in.
Should price continue to move to the top of the range, the second position would be closed out thereby gaining the full amount of pips encompassed in the range. In the case of this example that would be 40 pips. Those pips would then be added to the profit gained when the first position was closed out at +20 pips for a net gain of 60 pips.
Bottom Line: There are a variety of ways to manage the same trade setup. Choose the one that makes the most sense for you and the size of your trading account.
All the best and good trading,