Forex Range Trading With Price Action Forex Trading System By Laurentiu Damir Copyright © 2012 by Laurentiu Damir All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without prior written permission of the Author. Your support of author’s rights is appreciated. Table of Contents Introduction Spot a Trading Range Early with Price Action Trending versus Ranging Market Strong Impulsive Move Swing High-Swing Low Rule Identifying range boundaries early Trade Entry with Price Action Candlesticks Reversal Price Patterns Trend lines Trade Examples with Money Management Introduction It is well known and generally accepted that in about 80% of the time, the financial markets are moving sideways. If you are a day trader then you will probably not agree, but if you take the time and zoom out to a high enough timeframe you will find out that this is actually true. The financial markets just do not have it in their nature to make a new historic high or a new historic low too often. Most of the time they move up and down repeatedly, without going higher past the historic high or lower past the historic low. This is a range bound market. Ranging markets are the things that give the most headaches to forex traders. The majority of traders out there trade with the trend, they have a trend following system and they wait for that system to provide them signals or setups to enter into the market and trade. When the trend ends or stops for a period of time, those trend following systems start to give false signals and the trader has a good change unfortunately to lose all the profits previously earned. Or, in a best case scenario, they can judge for themselves when the trend has ended and just decide to play it safe and stay out of the market for a period of time. This is obviously better than the first option but it is still not good enough. A market moving sideways usually offers excellent trading opportunities as long as you are able to identify in a very early stage the trading range and then read the price action to enter and exit the market. The ability to recognize when the trend ends and a trading range is just beginning to develop can be the difference between success and failure in forex trading. Knowing how to spot a trading range in its early stage will not only keep you out of losing trades but it will also give you an edge as you will start to trade successfully when the market moves sideways and often times make even more profits than trading with the trend. This is what this book provides, a range trading system for the frequent time periods when the forex market moves sideways in a tight range. The system is based solely or reading the price action, it doesn’t use any technical indicators or anything resembling technical indicators. All of this being said, let us move on to the actual trading system. Spot a Trading Range Early with Price Action First of all, in order to be able to do this you must first have knowledge from a technical point of view of how to differentiate between a trending market and a ranging one. Trending versus Ranging Market If you look at any forex pair on any timeframe you will see that when price moves strong in one direction it makes strong impulsive moves followed by smaller correctional moves that are pointing against the direction of where the pair is clearly going. That is a trending market with a clear direction and determination of the pair to go up or down. Let’s see an example of such a trend. As you can see, in a trending market, in this case we have a down trending pair, the trend has a clear down direction but after those impulsive moves down, it stops to take a breath and correct itself. This generates smaller counter trend moves. After the correction phase, the trend down resumes and goes further down. This type of price movement generates swing highs and swing lows in the market. The points in the diagram above marked as LH are the lower highs or swing highs of the trend and the points marked as LL are the lower lows or swing lows of the trend. An impulsive move in the direction of the main trend is every strong move down in this chart that starts at a LH and ends at a LL. A correction move is every small counter trend move in the chart above that starts at every LL and finishes at every LH. Let’s see the same trend again to illustrate this. An important thing to always consider when judging a trend and trying to correctly label its highs and lows is the degree of the moves. Please notice in the example above that I have only labeled as LH and LL the price moves of roughly the same size or amplitude or degree. Those smaller moves inside the bigger moves are not relevant to our main trend. Let me illustrate this. In the same downtrend you can see there two small correction moves that do not qualify to be taken into consideration. They could be relevant for a downtrend on a smaller timeframe, but for this 4 hours timeframe trend they do not matter because they are of an inferior degree. There is however one exception to this rule. Small waves like the one above should be taken into consideration when labeling the trend only if the impulsive move that follows that wave is huge in length and very sharp or steep. Please look at the chart below. Please note that all three small waves in this chart are of the same degree or size. The difference between the first two and the last one is made by what price does after them. In the case of the first two small waves circled in orange price behaves rather normally after making them in the sense that the impulsive moves that follow are small themselves and match their preceding waves. These two are not to be taken into consideration when deciding on how to label the trend. The third small wave circled in red is different because of the huge and very sharp move down that follows. That move validates the small wave and gives it importance. As a consequence, this small wave is relevant to the main trend and should be labeled as a new pair of lower high and lower low in the downtrend above. As guidance, you should label the waves of an inferior degree like the one in the above chart if the impulsive move that follows after it is at least 4-5 times greater in length than the wave itself. You can see if that is the case just by looking at the chart, you do not have to measure exactly the number of pips. This is the only exception that you should make with small waves when labeling your trend.