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#3 Range-bound trading (34 EMA + 5 EMA)

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:

Range bound trading strategy

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:

Range bound trading strategy

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:

Range bound trading strategy

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:

Range bound trading strategy

Price holds inside the predicted range! Pretty good forecast, isn’t it?
(By the way I left MACD on the charts just for the reference to the method I’ve described earlier in range-bound trading #2)

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.



Truly yours,
Edward Revy
http://forex-strategies-revealed.com

thanks. great strategy.

Great series of articles on how to detect a ranging market! This has been an area where I have had a problem in my trading before. This should help!

Ken,

The Cat Preacher

Hi Edward,

Thanks for the valuable info. Does it work on 4 Hour and 1 Hour timeframes as well ? I am trying a strategy using 4H and 1H TFs as the main trend direction.

Happy Holidays,
Nasri

Hi Nasri,

It works on all time frames without exception.

Happy holidays!

Edward

hi Edward
Happy Holidays

ivan

Hi Ivan,

Happy and prosperous Holidays to you too!

Edward

Hi Edward

Hope you and family have a very happy new year
Thanks for sharing this trick to predict ranging market. Just have some questions:

1. What proper strategies you recommend in such condition?
2. How to determine when the ranging period ends and true breakout occurs ( by using RSI, MACD, bar close above/below MAs, etc....)?

I think if we are able to spot ranging market then we can take advantage of it.

Thank you,
Regards,
Keith.

Thank you, Keith

While in the range, we use our defined range boundaries to enter and exit trades.

We can also use Bollinger bands, where we can confidently trade the bounce of the BB lines. There is a well known strategy by J.Ross, which can be downloaded at our forum: Gimme bar system by J.Ross

Also we can add RSI on top, and take only those trades where RSI (3) has reached oversold/overbought levels. Since we know that the market is in the range (till it breaks out), RSI will allow to catch a momentum. Same trick can be done with Wiliams R% indicator or Stochastic.

A breakout is valid when it surpassed our range boundaries, namely a new candle not just pokes, but closes outside the boundaries. Then withing few next candles we expect a re-test of the breakout level, if it holds (=market closes outside the range again) then we can plan our trades with the trend.

This strategy can help visualising the idea of trading valid breakouts and avoiding whipsaws: Trading Breakouts of the Breakouts

Best regards,
Edward

Best regards,
Edward

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