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Part III. Ranging Market by Indicators

Ranging Market by Indicators - Forex School
Commander in Pips: As you understand from the topic of this part, we will talk about ranging market. Speaking definitely, how different indicators tell us that the current environment is a ranging market.

Pipruit: But Sir, this is probably will be just an opposite to a trending market…​

Commander in Pips: Absolutely. This part will be very light in term of education. So, I suppose you can tell me about ranging market and indicators by yourself.

Pipruit: You think so?​

Commander in Pips: And why not? We will talk only about what we already know.

Pipruit: Ok, let’s try it.​

Describe how ADX, Bollinger Bands and different oscillators behave in a ranging market.- Forex School

Commander in Pips: Fine, so is your plan – tell first about ranging market – what is it, then describe how ADX, Bollinger Bands and different oscillators behave in a ranging market.

Pipruit: A ranging market is when price action holds within some range. Also we call such market’s condition as contraction, because all swings do not exceed 1.0 extension from previous ones. Particularly that makes the market stand in the range. Initially the market establishes some high and low price and all consecutive price action holds between them. The high acts as major resistance while the low acts as major support. Market movement itself could be categorized as sideways or horizontal.​

Commander in Pips: Very good. Let’s pass to ADX.

ADX in a ranging market

Pipruit: As we know ADX shows only a trend’s power but not its direction. In the common approach it is treated that a trend increases (gaining power), when ADX moves above 25. When it reaches some highs and turn to decreasing, it means that the trend becomes weaker. When ADX stands below 25 it tells that there is no trend currently, or other words – a ranging environment. Such example we can see on chart #1:​

Chart #1 | 5-min EUR/USD and ADX (10)
ADX shows only a trend’s power but not its direction.- Forex School

Pipruit: Still, we see that ADX is a bit lagging. Although it shows trend start relatively on time, it lags when the market turns to ranging. See – the market stands in a range a long time, while ADX is still moving down towards 25, shows that trend still holds, although becoming weaker.​

Bollinger Bands

Pipruit: I do not quite understand all the stuff that you’ve explained about standard deviations and normal distributions, so my foundation is what you’ve told about trending market. Since ranging market is opposite to trending one, hence, our thoughts here have to be opposite also.​

Chart #2 | 5-min EUR/USD and Bollinger Bands (20)
5-min EUR/USD and Bollinger Bands (20) - Forex School

Pipruit: I use red lines for 1 standard deviation, while blue lines for two standard deviations. Since, you’ve said that during trending environment market should mostly be between these lines, then, during ranging behavior, it should stand in the middle – inside red lines, right?​

Commander in Pips: And what will you answer if I say that both MAs have the same period…

Pipruit: As I’ve said, I do not quite know it.
Commander in Pips: Ok let me just make small theoretical add-on to your purely practical thoughts. In fact the width of the lines shows volatility – average deviation of price from its average. The red lines show a single standard deviation on both directions, blue lines show two deviations. When the market turns to ranging, the overall trading range contracts, hence, the deviation from average price is also contracting. That’s why the bands narrow and converge to each other.

Second, the red lines show interval where price should stand with a probability of 68% - just a range of 1 standard deviation. AS market stands there it tells that volatility decreases significantly and the market in contraction mode. In other words – it’s ranging and it tells us that there hardly will be strong move in any direction. However, if bands start to expand telling us that volatility increases, it cautions us about a probable trend starting.

Pipruit: So, we can say, that in general, a ranging environment will be on the road with width decreasing between the bands and mostly in the horizon direction. Simultaneously price will stand in some horizontal range also, right?​

Commander in Pips: Yep. And what is a major idea in a ranging market?

Pipruit: While price moves with in some range, trader hopes to make money, if he/she buys near the bottom and sells near the top and vice versa.
Commander in Pips: Right. So the last indicators that you have to tell me about are oscillators.

Applying oscillators in a ranging market

Pipruit: Ok. As we know oscillators are normalized indicators in 0-100 range. RSI and Stochastic are the most widely known among them. In a ranging market they will work well, giving us signals, according to classical rules, that we’ve discussed in the corresponding chapter dedicated to them.​

Chart #3 | 5-min EUR/USD and Stochastic (8;3;3)
5-min EUR/USD and Stochastic (8;3;3) - Forex School
Pipruit: Combining of oscillators with other tools could help to determine zones for Sell and Buy action with more precision, because they turn to oversold/overbought conditions there.​

Commander in Pips: Well that’s right. Also, it makes sense to note here that it’s better to apply range trading strategies with crosses. For the long term very suitable for that purpose were EUR/CHF and EUR/GBP pairs. But due to some turmoil on financial markets, demand for safe-haven CHF increased significantly, so EUR/CHF has turned to solid downward trend. Still, in a calm environment, when the crisis will end, these pairs will again become attractive for range trading.

So, we’ve met with trending and ranging markets. Still, as I’ve said in the beginning, applying indicators for identification what market currently stands is a not simple task to do. The big problem with that is a problem as a chained circle. From the one point of view you apply, say, oscillators on a ranging market. From the other point – they have to tell you that this is a ranging market. That’s why I suppose that a harmonic approach is better. Still, this is a classical theory and we have to know it as well.

Comments

pavel88888888
2 years ago,
Registered user
Добрый день Sive, а разве показания ADX не должны быть что меньше 20 слабый тренд, больше 40 силный тренд? Заранее спасибо за Ваш ответ.
Hamza Samiullah
2 years ago,
Registered user
Nice work...
One-fm
8 months ago,
Registered user
Fine explanation

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