Identifying Trending and Ranging Markets

 
 
 
For traders who use charts and technical analysis, identifying trends and ranging or range-bound markets is an important aspect of their trading strategy. A trending market is one in which the price of the currency pair is, on the whole, either rising or falling. Prices never do this in a straight line. Depending on your time scale there will be weekly, daily, hourly and minute-by-minute fluctuations. A market with a downward trend will still experience periods where the price rises and an up trending market will still see falls. It’s just that the overall direction will be in one direction or the other.

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A raw price graph using candlesticks to represent price data over shorter periods of time can be very useful for identifying trends. The candlesticks represent a given period, typically though not always a day, and convey the opening and closing price as well as the highest and lowest price during that period.

You can identify a trending market by looking at the lows and highs represented by the candlesticks. There will be fluctuations over time but if the highs and lows are gradually coming in at a lower price than they previously were, you will be looking at a down trending market. The chart itself will descend from left to right, usually like a series of jagged steps. If the highs and lows occur at higher points, you will have an up trending market. This will ascend from left to right in a similar series of steps.

In general terms, you will probably want to trade with the trend of the market, at least initially. There might not be as many trades available, as other traders will have the same idea, but those you can get are statistically more likely to be successful. This can be particularly true for longer rather than shorter-term trades.

If you can identify those periods where the price bucks the trend, of course, rising during a down trend and falling during an up trend, you will have a great opportunity to make money. This does require a measure of skill, experience, and supplementary strategies, though, and might not always be the best approach for beginners. Some use news events and other indicators to anticipate market reverses while identifying and reading support and resistance zones can also be very useful. These are the areas that the price will fall to (for a support zone) or rise to (for a resistance zone) before returning to its original position or continuing in the direction of the trend.

A ranging market remains within a certain price range over a given period of time. Essentially it is stuck between the support and resistance zones, with each being repeatedly hit in turn. This market is moving neither upwards or downwards and so has no overarching trend. This can make it more difficult to trade as it is more unpredictable and fluctuations may be in either direction rather than heading more strongly either upwards or downwards.

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