Trending Market and Ranging Market: How to Discern One from Another – Part 1
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 particular 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. Let us describe the markets individually.
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.
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.
Now that we know what trending and range-bound markets are, the next logical question would be:
How can we 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).
Trending Market: Here market is in an uptrend as shown by the arrow.
In my next blog post, I will provide more information about the best techniques to determine market conditions and share with you a powerful Forex tool you will love.
Stay tuned for part II!
P.S.: Like the post? Share it! Thank You!