It is a fact that the Currency markets trends only 20% of the time and ranges 80% of the time. A lot of traders get trapped in one of these markets conditions not using the right approach to each type of market, which obviously leads to constant loss of trades. You see you have to be able to pin-point the difference before you can be profitable in the FOREX market. You have to develop a system for both ranging and trending markets but the most difficult task is identifying both market scenarios. I personally love to trade strictly on trending markets due to the fact it allows me to risk little and earn more. Have you heard of the saying “cut your losses short and let your profits run”? During the trending market is the best time to apply and practice this. You can’t let your profits run during ranging markets else you give back all you’ve earned from the market. Moreover, there’s another saying about “the trend is your friend”. Have you ever come about a saying in the world of FOREX that says “the range is your friend”? It sounds funny, doesn’t it?
However, ranging or trending market is not the subject matter so we would not put much focus on them but before we go further, i would want to define what they mean. A trending market in any financial markets is a type of market whereby price moves in a single direction making higher highs/lower lows and it usually closes on an extreme for the day. On the other hand, a ranging market is a market type where price moves up and down between two well-established levels, never truly ‘breaking out’ of either the upper or the lower level. Ranging markets have profit opportunities as well if well understood how to apply the right strategy trading it. However what is the that factor that makes the market trends or ranges? That is our main focus in this article.
Over the years of my trading journey, i have always wondered what drives the market? What makes the market trend 20% of the time and what makes it range 80% of the time? At first i thought it was indicators, supply zones, demand zones, resistances, supports etc. Truly speaking all factors listed have some role to play one way or the other, i built all my understanding on that framework till i met a friend who introduced me to fundamentals. You see price does not move because it has to or wants to move because your indicators are telling it to. The FOREX market is built and structured strictly based on Economics, this is the real truth if you have been mislead. Everyday there are several news information being released from different countries around the globe which affects the value of individual currencies.
If you are very observant, you will realize there’s no week a particular currency won’t cause a trend in the market due to a fundamental news release. However, the depth of the trend formed relies on how investors digests the information derived from the economy of the given country which most times depends on strong or weak outcomes. Just yesterday the Great Britain Pound weakened against the US dollar after the Bank of England cut its forecast for U.K. wage growth in half and said the pace of wage growth would be key in determining how quickly interest rates will rise. In the diagram below, you will see how the Great Britain Pound plunged against the U.S dollar providing a wonderful trading opportunity. In this particular trade, i was able to get a whooping 70 pips profit risking just 10 pips stop loss. This is exactly how the Financial institutions trade, they wait for a fundamental release and use there technical indicators to spot high profitable trades.
Take note when there’s no economic information to fuel and give clear direction of price movements in the markets, this is when the market ranges 80% of the time. A best time to apply ranging strategies is during these times, whereby traders can use swing trading systems like picking bottoms and tops. Typically a fundamental release makes a lasting impact of minimum 2 daily trading sessions and some times it could last as much as 4 days. After these days, the momentum wanes off and the ranging game begins. So if you are a trend trader, my advise for you is to watch out for important economic news releases to spot trends. On the other hand, if you are swing trader, i advise you to wait for trading days where there’s no fundamental release or after a fundamental momentum has waned off from the markets to trade demand and supply zones.