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Trading forex may seem complicated, but it's profitable if you learn a few things. Some important factors to master are trends and ranges.
Learning these two trading terms and what they mean can help you to manage your money wisely in the forex market.
Here is a short explanation of trends and ranges to teach you which of the two to pick and the implications.
What is a trend?
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A trend is a deviation from a range in Bollinger Bands which are indicators used to determine market volatility.
Trends are signified by price movements in one direction on forex charts.
They signify a deviation in currency prices. This deviation is contained by an upward or downward-sloping 20-period simple moving average.
In trend trading, price troughs and peaks move in the same direction.
Traders rely on resistance and support lines to plot their entry and exit in this type of trading.
What are resistance and support levels on Forex charts? Well, resistance levels are points in a chart that indicate a surplus of currency sellers.
Support lines are points on a chart that indicate a surplus of buyers.
These two points are continually plotted as currency prices move downwards and upwards during trading.
When a currency pair moves in one direction with little resistance, it is on an uptrend. This type of trend is characterized by higher swing lows and wing highs.
These lows and highs help traders identify bearish and bullish trends and take advantage of them to profit.
It is a bearish trend when currency price highs and lows move downward. And when they are moving in an upwards direction, it is a bullish trend.
A trend is complete when there is a break in support or resistance lines. This is usually a sign that it is beginning to reverse.
Traders who rely on trends focus on joining a trend early and holding that position until it reverses.
They usually take time to learn currency patterns which helps them to identify the trend to invest in and when to cash out.
For example, trend reversals are known to come after a four-step pattern.
Trend traders rely on in-depth market analysis to find the right entry and exit points.
They minimize losses by adapting rigorous risk control and working with tight stops.
A trader who prefers to trade with trends makes trading decisions by looking at trends showing signs of going further upside.
They let go of a trade when the upward movement breaks, and the market shows erratic behavior.
If a trend trader is undisciplined, they may lose speculative capital to brokers who make an unexpected margin call. However, they can earn lots of profits if they make the correct choices.
Therefore, trend traders should not risk more than 1.5 - 2.5 percent of their capital on a trade. This requires them to place stop losses 15 - 25 pips behind the entry point.
What is a Range?
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A range is a sideways movement of currency prices on a forex chart. It is used to identify resting periods from one trend to another.
Ranges are formed using data from historical movements in the forex market.
Range traders do not focus on the direction a currency is traveling towards.
They always assume it will return to its starting point regardless of the direction it travels.
Their aim for the currency prices to trade on the same level repeatedly, creating oscillations from which they can profit more than once.
Range forex traders identify major support and resistance points on forex charts and connect them with trend lines.
They analyze prior support and resistance levels and prefer those that are consistent over a two-year period to make trading decisions.
These traders plot predefined exit points on forex charts based on their risk analysis and risk management strategy to avoid excessive losses.
Their trading analysis and strategy is based on technical indicators such as stochastic oscillators, Average directional index (ADX), relative strength index (RSI), price action, and volume.
These indicators help them to determine whether to enter a long or short position in a trade.
When trading, range traders usually use stop-loss orders to minimize their risks and losses. These stop losses are placed at points where they think a trend will take a different turn.
Which is better, trend trading or range trading?
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