Page 3 - Module 15 - Trending or Trading

Module 15 – Trending or Trading

There is a big difference between ranging and trending days. To successfully trade currencies, you
must be able to detect as early in the morning and as quickly as possible the difference between the
two types of days.
The movements of currencies in the Forex market will produce one of two types of directional
movements on the currency charts. A currency pair can be described as:

▪ Ranging, when the net movement of the currency pair is neither upwards nor downwards,
but sideways.
▪ Trending, when the currency pair has either an upward net movement (bullish) or
downward net movement (bearish).

The ability of a trader to discern which of these market trends is operating in the market at any time
is a major determinant of how the market can be played for profits. Typically, the common belief
among many retail traders is that money can only be made when trading Forex in a trending market,
but this is not the case. There are opportunities to make money even in ranging markets; it only
depends on if the trader is able to decipher a ranging market, and know how to profit from it
accordingly.

1. Characteristics of Ranging and Trending markets

Ranging market
Ranging markets are also known as range-bound or consolidated markets. In ranging markets, there
is no clearly defined upward or downward movement of a currency, as the markets tend to move
within a range. There is a price ceiling and a price floor that determines the market range. The price
ceiling acts as a resistance, while the price floor acts as a market support. The price action in a range-
bound market tends to move around between the support and resistance so formed, giving the
market a sideways direction. Some currencies are known to be range-bound most of the time. The
USDHKD is one, because the Hong Kong government has a form of peg on the value of the Hong
Kong Dollar. Prior to 2009, the EURGBP was also known to be a range-bound currency, but this has
largely unravelled and this currency pair now trends like any of the other major currencies.

Trending market
A trending market is one characterized by net movements of the price action of a currency pair in an
upward or downward direction. We say, “Net movements” because in either direction, the market
does not just assume a one-way traffic movement. There will be periods of retracements and pull-
backs but when the corresponding longer-term chart is used, the movement of the currency will
generally be seen to be in one direction or the other. When applied to the Forex market, there are
currency pairs that are strongly trending in nature. The GBPJPY is one of such currencies. When a
trend has developed, it can remain sustained for weeks.

2. How do you recognize trending and ranging markets when they occur?
If you are experienced, you can actually recognise these markets by sight. However, for others, it is
best to use on or two technical indicators to distinguish a ranging market from a trending one. One
of the easiest ways to do that is to use the Bollinger band indicator. Once you apply a Bollinger band
to the currency chart, you will see the Bollinger bands following the candlesticks, and then you can
visualize the market going up or down (trending) or moving sideways (ranging).

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