How to Forecast Range-bound Markets

We’ll go over  methods of detecting and trading during range-bound markets.
Join in to discover new ideas, indicators and tools to gain additional control over range-bound trading.

The fact is, during well trending markets majority of Forex traders trade profitably and comfortably, but once a trend is over all kinds of problems arise: trend-following systems no longer work, frequency of false entry signals increases bringing additional losses which eat up earlier accumulated profits.
 Taking into consideration that Forex market spends up to 50% time in non-trending, sideways state, the knowledge of how to deal with range-bound markets becomes vital.

What is the simplest thing we know about the range-bound market?

...Its beginning is difficult to spot. Quite often by the time we realize that the market is ranging we’ve already made few errors and paid for it.

There are various strategies that tell how to trade during range-bound markets, but there are few that teach how to spot range-bound markets on their earliest stages, so that we can actually have a choice: to trade or to avoid it.

Range-bound Forex trading (General guidelines)

 #1: We’ll be discussing methods and ideas for detecting and trading during range-bound markets. These methods are not going to shield you completely from ever changing market weather, but will help you to anticipate and make “weather forecasts” with additional accuracy.

#2: We'll use the main rule: if the market is not trending, always treat it as a ranging market.
When using indicator signals, if an indicator no longer shows signs of a healthy trend, immediately treat it as a beginning of a range-bound market until further improvements.

 #3: There are few systems that can trade really well during both: ranging and trending markets, more often it is either one or another. If your trading system keeps losing during ranging markets, you have 2 options: a. stop trading during range-bound markets; b. make an additional system to use during this period.

Lets begin  

Many systems start with words: "I’ve been observing charts for a while, and suddenly an idea popped up in my head". Same was with this one for me. I’ve been looking at charts, in particular at moving averages, and came up with a trading plan to foresee upcoming ranging markets.


This is the earliest detection of a ranging market known to me, and I’d like to share it with you today.
Trading rules:
On any time frame we need two Moving averages: 34 EMA and 5 EMA.

After both moving averages have been trading apart for a while = the market was trending, start watching for the first candlestick to touch both moving averages (body + shadows, everything counts). Here is our first candidate on the screen shot below:

 

 This is the first earliest sign that a sideways pattern might be forming. I used words "might be" because we don’t know what’s in for us ahead. But let's go step by step. Below is what you’ll be actually seeing in real time:

 


Our next step is to look behind that candlestick and identify the closest swing high and low. Both those swings should be outside the reference candle body length, including shadows. Reference candle is the one I’ve circled in blue.
Once we've found both swings, draw horizontal lines thought them as shown on the screen shot
below:






That’s your anticipated range area ahead. As long as price stays inside that area, you can treat it as a range-bound move.
Let’s now have a look what were the actual results:

 

 Price holds inside the predicted range! Pretty good forecast, isn’t it?

 But that’s not all. We can go further and each time a new candle touches both Moving averages, we are free to reset our range boundaries to new highs and lows using the same old rules. Range boundaries can go up and down during each new re-set, it is fine.


You can now trade breakouts out of those ranges, or wait till there is a new trend to be traded.
When re-setting, keep the boundaries of the very first range for the reference, when price finally breaks that level – that’s a significant achievement, and a new chapter for a new trend.