Forex Range Trading with Cross Currency Pairs
Posted on July 30, 2010 with Comments Off
If a forex trader is trading within the ranging strategy, sometimes it is difficult to identify currency pairs that are more possible to remain range-bound and to be more profitable this way. The solution that can help to avoid this difficulty is staying away form the dollar-centered currency pairs and watching the currencies’ interest rates of the central banks.
It is said that it is better to trade the currency pairs including US dollar as their component within the trending strategy, in contrast to the range strategy. However, ranges happen in dollar-based currency pairs as well, but trading them in terms of ranges for a long times appears to be ineffective and unprofitable. This happens because currency pairs including dollars turn out to be unable to stay within a range for a consistent period of time.
However, the cross-currency pairs are more likely to remain within a range. It is important to mention that the most widespread pairs for the range trading according to the recent historic data are AUD/NZD, GBP/JPY, EUR/JPY, and GBP/CHF. They show stable ranging environments for sufficient periods of time.
If a currency pair tends to trend, the possibility that it will make successful range-bound trades in forex market is very low. On the contrary, if the currency pair doesn’t have a strong trend, the possibility of the profitable ranging strategy rises.
Certainly, no one can promise that this is true for all currency pairs in all condition s and all time frames. Definitely, exceptions happen. As for choosing the currency pairs that are best for the range trading a forex trader should pay attention to such indicator as low interest rate differentials – pairs with low interest differentials increase the chances of profit in range-bound trading.
Moreover, a forex trader has to watch the long-term charts closely – they give a perfect picture of which countries are interlinked in economic and political terms – this will also contribute to understanding what currency pairs to choose for forex trading and what forex trading strategies better to use.
However, the key thing about the forex range trading is that if a certain currency pair has good preconditions for the range trading, this doesn’t necessarily imply that will last for a long time. Thus, it is crucial to work out the risk management strategy in addition to the suitable forex trading strategy. Nevertheless, identifying cross-currency pairs for the range trading increases the chances for a profitable forex trade.
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