Retail Forex Trading Tendency To Range Trade - Fresh Insights
By: Jay Meisler
Copyright (c) 2009 Jay Meisler
The growth of retail forex trading, which tends to rely on technicals to make trading decisions, has coincided with an ever increasing use of such indicators to drive currency markets. However, there seems to be a bias in how retail forex traders approach the market, which is not as trend followers but as range traders who use technicals to help guide trading decisions. These range trading strategies can have a measure of success in normal markets (depending on proper risk/reward trades, money management, etc) but when a trend or breakout develops, it can prove fatal to the undisciplined trader. The goal of this article is to add some insights into the range trading approach and suggest some ways to add flexibility and discipline to increase the odds of success or at least staying in the game to trade another day. The following is a discussion on range trading from the Global-View forex forum to illustrate these points.
As posted on the Global-View Forex Forum:
GVI Forex Jay 13:07 GMT September 11, 2009 Range Trading: One characteristic of retail traders is they tend to trade markets as ranges. This generally sees them looking to buy on weakness and sell on strength, often not using stops as they employ a range strategy. There are some who will add to losing positions to average the price in the hope of improving the breakeven exit level. This works when the market trades in ranges although one will argue there is an opportunity cost of not using stops and holding on to losing positions in the hope that the market will come back to breakeven or a profit. This strategy can be painful when markets go from ranges to trend as those fading the market may not see their entry level again. Doubling or tripling up in this environment can prove fatal.
Please note that the above is a generalization and prudent money management can change results but for the average "fade the market" approach, breakout markets can be painful or even fatal. We always recommend using stops. We also suggest being flexible and recognizing when the market is trending (i.e. this week's breakouts are an example) and not trading a range.
Reply from a forex forum member:
sofia kaprikorn 22:25 GMT September 11, 2009 Range Trading: Reply hmm - interesting to look at this topic from another perspective.
As you say 'retail traders' tend to do this in the observed way. I'm interested why or how is the way to change this.
What I mean is that if retails do it wrong then there must be a Correct way - or the way of the Pro's or the 5-10% group who make it.
Then I ask myself why am I a loser - was it that I started in a wrong way or it is a permanent flaw in my personality that can't be changed since I repeat the same mistakes even after 4-5 years of trading.. and it is not the knowledge since I gathered so much knowledge that I can easily cover any area from Japanese candlesticks to trend-following systems.
I have read material on trader psychology and it seems that the clue is in the Right Conditioning or maybe discipline, which is interesting if one can re-condition himself or impose strict discipline on himself.
Certainly the debate of whether a winning trader is born or conditioned is a pretty old one (case in point Richard Dennis & William Eckhardt turtle experiment) and some will make and others will not.
Reply to the forex forum member:
GVI Jay 12:40 GMT September 12, 2009 Range Trading: Reply
Kaprikorn. As we have discussed, I have never read a book on trading (except the one we wrote) and anything I say is just from my personal experience.
The fx market tends to trade ranges, even during trends when the market pauses and consolidates. These ranges can often lull the range trader into a feeling of complacency and this is when some get into trouble when the trend reasserts itself and the trader either doubles up on a loser or holds on hoping the market will come back into range. This is why we suggest always using a stop.
Without going into too much detail, this is my approach:
- Always be aware of the broader trend (e.g. daily charts) - that is what drives the real money flows and where there is risk of technical breakouts, reversals or corrections.
- For example, if you are trading in shorter time frames, such as 5 minutes, 15 minutes, 1 hour, you can trade those trends but put them in perspective vs. the broader trend and don't treat them as the underlying trend in the market. It is too easy to get lulled into thinking the 1 hour, for example, is the real trend when in fact it might just be a counter trend to the overall trend.
- If trading against the overall trend, be quicker to take profits than if going with the trend as the market will tend to reverse quicker
- There is a better chance of seeing your levels again if you are with the overall trend and market moves against you
- Look for anything in the daily chart that will change the overall trend. This will tell you what the risk is in the market
- One example that is worth reviewing (see chart above) -- note the summer range for the eur/usd but look at the broader trend to put it in perspective. There was a major trendline on daily charts that was never threatened. There was also a minor up channel that stayed intact despite times the eur/usd looked like it was heading lower. This is what I mean by the broader trend. Of course, it is easier to discuss this in hindsight with the help of the chart but it does show a good lesson in keeping the broader trend (and risk) in perspective.
This just scratches the surface but hopefully gives some insights into trading ranges.
About the author:
Jay Meisler is a co-founder of Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas =>http://www.global-view.com
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