Forex trading: Trend vs. Range trading

We have all heard the axiom, “the trend is your friend”; well this can be a very true statement, assuming that you have a well thought out trading plan that allows you to take advantage of market trends. However, it is very obvious by looking at any price chart that markets typically spend more time in consolidation or trading ranges than they do trending. Ideally we would like to develop a trading strategy that allows us take advantage of market consolidation as well as market trends.

Most oscillating indicators such as stochastics, rsi, or
MACD, are designed to show you when a market is over-sold or over-bought. The
problem with this is that when a market is in a strong trend these indicators
will show over-bought or over-sold on a small pullback in the trend. So if you
take the entry signals from these indicators during a strong market trend, you
will get slaughtered. They do work semi-good in a ranging market; however they
are still quite unnecessary to developing a widely applicable trading system.

Ideally what we would like to have is a trading system that
gives us a unique market perspective which allows us to profit in all three
market conditions. Once you accept the fact that indicators only work in
certain market conditions and even then are really just confusing the true
price action that you should be concerning yourself with, you can get down to the
real meat of the market, which is price action analysis.

Stripping your charts of all unnecessary and confusing
indicators will leave you with only price bars. After all, aren’t we mainly
making our trading decisions off of price anyways? Why then would you look at
something that is derived from price when you could just look at the price
itself? Any entry or exit signal that any indicator will give you has already
occurred in the market in the form of a price pattern. All we need to do is
educate ourselves on what to look for and we will be able to spot entry and
exit signals right as they occur, instead of 5-10 bars later via some lagging
indicator.

So to re-cap, in order to consistently profit in a trending
or ranging market we will need a trading methodology that gives us the
knowledge to do both. Price action analysis, in my opinion, is the only
educational tool available to traders that will give you the necessary
perspective on markets that you need to develop a trading strategy that will
allow you to consistently profit. Whatever market condition you encounter;
trending or consolidationBusiness Management Articles, a solid back round in price action analysis will
give you the ability to devise an applicable trading plan and consistently
profit. 

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