Spotting a Trading Range Early with Price Action
You must first understand how to distinguish between a trending and a ranging market from a technical standpoint in order to be able to accomplish this.
Trending versus Ranging Market
Examining any forex pair over any period of time will reveal that when the price swings strongly in one direction, it produces strong impulsive moves, which are followed by smaller correction moves that point in the opposite direction of the pair’s obvious direction.
There is a distinct direction and determination of the pair to move up or down in that trending market. Let us look at an illustration of this trend.
As you can see, in a trending market—in this case, a downtrending pair—the trend is clearly headed downward, but it pauses to catch its breath and right itself after those rash downward moves. Smaller countertrend movements result from this.
The downward trend continues after the correction phase and continues to decline. The market experiences swing highs and swing lows as a result of this kind of price fluctuation.
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The trend’s lower highs or swing highs are indicated by the points in the above diagram that are marked as LH, and its lower lows or swing lows are indicated by the points that are marked as LL.
Any significant decline in this chart that begins at an LH and concludes at an LL indicates an impulsive move in the direction of the main trend. Every little countertrend move in the aforementioned chart that begins at each LL and ends at each LH is referred to as a correction move. To demonstrate this, let us look at the same pattern once more.
The degree of the moves is a crucial factor to constantly take into account when evaluating a trend and attempting to accurately identify its highs and lows.
Please take note that in the example above, I have only designated price movements of approximately equal size, amplitude, or degree as LH and LL.
The little moves that are contained within the larger moves have no bearing on our primary trend. Let me explain.
You can see two minor correction moves in the same decline that are ineligible for consideration. They might be important for a downturn over a shorter period of time, but since they are of a lower quality, they are irrelevant for this 4-hour trend.
This rule does have one exception, though. When classifying a trend, little waves like the one above should only be taken into account if the impulsive move that follows the wave is extremely long, steep, or sharp. Please review the following chart.
Please take note that this chart’s three tiny waves are all the same size or degree. The price that follows them distinguishes the last one from the first two.
The price acts rather typically after the first two minor waves, which are circled in orange, in that the subsequent impulsive swings are also small and correspond to the waves that came before them. When choosing a term for the trend, these two should not be taken into account.
The massive and extremely abrupt descent that follows makes the third little wave, which is circled in red, unique.
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That action lends significance and justifies the little wave. This little wave should be classified as a fresh pair of lower highs and lower lows in the downtrend above since it is pertinent to the main trend.
As a rule of thumb, if the subsequent impulsive move is at least four to five times longer than the wave itself, you should label the waves of a lesser degree, like the one in the preceding chart.
You do not need to measure the precise number of pip values to determine whether that is the case; all you need to do is glance at the chart. When naming your trend, this is the single exemption you should make for tiny waves.
The only difference in the appearance of an uptrending market is that the trend is up, which means that the corrective little swings are pointing downward against the trend and the large impulsive moves within the trend are pointing upward. Let me explain.
You may observe an upward tendency in this case. The price is rising as it alternates between impulsive increases in the trend’s direction and correction swings in the opposite way. Impulsive price movements are indicated by green lines, while correctional price movements are indicated by red lines.
Since it is too minor in relation to the other moves to have any significance for this large 4-hour timeframe trend, the small move that is circled in red is of inferior degree and should not be classified as an HH-HL pair. According to a very technical perspective, this market is trending. The market experiences highs and lows due to the waves of trends.
Labeling the highs and lows of your trend is always a good idea because it will help you determine whether a trading range is beginning to form.
Technically speaking, a ranging market is one that does not exhibit the characteristics of the aforementioned examples. A sideways market is defined by the price starting to produce swing highs and swing lows inside the area of the most recent impulsive move rather than making new highs and lows. Let me explain.
There is a definite downward tendency in this instance. We refer to the wave formed by the price as a pair of lower highs and lower lows. The price does not drop below that second impulsive move, creating another pair of LH-LL.
It is beginning to meander laterally, making swing lows that remain above the trend’s lowest point and swing highs that remain below the most recent LH. There has been sideways movement in this pair.
This pair will continue to exhibit sideways price activity and should be handled as such until the price rises above the most recent lower high or falls below the lowest point in the downtrend. Let me give you a simple example.
To sum up, this is the technical distinction between a sideways market and a moving market. The market constantly reaches new highs and lows when it is trending; when it is sideways, the trend pauses and the market reaches highs and lows inside the previous high and low’s zone.
You should be very cautious about the trading setups your trend-following system provides you with when you observe this type of price activity. Let us look at another instance when a trend veered to the side, but this time it was upward.
The price is reaching new highs and lows, indicating an upward tendency. The price attempts to rise further and form a new HH after the third HH, but it is unsuccessful and falls back to make a swing high and a swing low that are contained by the final HL-HH pair. This is a clear sign that a range is going to form.
The second indicator on this chart that indicates a trading range will be revealed later. The price then manages to move higher past the previous HH before quickly falling again and making another set of high-swing lows inside the final HH-HL region.
It would have been quite lucrative to have identified this long period of sideways movement at the outset. By now, you should know exactly how to use price action to determine if a pair is trending or ranging.
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