Avoiding trading in ranging markets

Before reading this lesson, you should have previously read through:
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The beginner strategy is a trend following trading strategy, i.e. it works better when the market is trending.

This is because if the market is trending, then your profit targets are more likely to get hit, so long as you trade in that direction.

There is a distinct advantage to identifying when the market is ranging, because it can help to filter out unprofitable trades in the beginner strategy.

There is therefore an advantage to being able to identify when the market is trending and when it is ranging, because you can avoid ranging market conditions and reduce the likelihood of unprofitable trades by waiting for a price breakout.

This is called filtering, a way of avoiding certain market conditions to avoid unprofitable trades – in this case, avoiding ranging markets. Once you have identified a ranging market, then you can wait until the price breaks out of that range before you start to look for trades.

The chart below shows an example of the price breaking out of a range:

Ranging and trending market

number_1 The price is ranging
number_2 Upper boundary of the range
number_3 Price breaks through this range to the upside
number_4 Price is in a trend

A price range has an upper and lower boundary

An effective method of determining a price range is to identify the upper and lower boundary and place support and resistance levels at them. Then when the price breaks out of the range you can begin to look for trading opportunities.

You can see in the chart below that the shaded area, shown at number_1, is in a clear range between the resistance level, shown at number_2, and the support level shown at number_3. The price then breaks out of this range and enters into a trend, shown as number_4.

Ranging market with smaller candles and upper and lower boundary

number_1 Ranging market
number_2 Resistance level
number_3 Support level
number_4 Trending market

A hint to see if the market is ranging, is to look at the candlestick formations. If the candlesticks are unusually short and have long wicks, then this is further indication that neither the buyers nor the sellers are managing to gain momentum.

You can see in the chart above that the candles within the range highlighted in the shaded area number_1, are distinctly smaller than those outside the range.

Applying range break out to the beginner strategy

To include this filter into the beginner strategy, you start by determining the direction on the 30 minute chart as per usual. Once you switch to the five minute chart, you refrain from looking for any new opportunities until the price breaks out of that range.

You should note that after the price has broken out of the range, you go through the whole process of looking for a setup. So, if the market direction is down, then after the price has broken out of the range, you must first look for a broken up fractal and then look for a broken down fractal to enter – and vice versa if the market direction is up.

To illustrate this, take a look at the chart below where we show the same example as above, but applied to the beginner strategy – in this situation, the market direction is down:

Short entry after a breakout

After the price has broken out of the range, you then look for the up fractal to be broken, shown as number_1. Then you enter when the down fractal is broken, shown as es1.

You can filter trades using support and resistance

Sometimes the market will be ranging, but the range will not be the tight range that has been shown above. Sometimes there can be a reasonable enough distance between the upper and lower boundaries to enter trades in between.

If you identify an upper and lower boundary of a range, this means you can avoid trades if the entry is too close to the upper boundary for a long trade and too close to the lower boundary for a short trade.

To do this, you can look for the most recent support and resistance levels on the 5 minute chart. Take a look at the chart below:

Avoiding support and resistance

number_1 Resistance zone
number_2 Support zone

You can see that there is a clear zone of support and resistance that you can use to filter your trades. You do not have to search for support and resistance levels on higher times frames, just the most recent support and resistance levels on the 5 minute time frame where you are looking to enter into a trade.

In the following example, we demonstrate how you can apply this to the beginner strategy – in this example the market direction is up.

Waiting until a break out occurs

The down fractal has been broken at number_1 and using the traditional rules of the beginner strategy, the entry would have been at number_2. However, it is very close to the resistance zone. Waiting for the price to break out of the range to the upside and then take an entry, shown as number_3 gives you a better chance of a profitable trade.

Summary

So far you have learned that...

  • ... the beginner strategy is a trend following trading strategy and so there is a distinct advantage to be able to recognise when the market is not trending.
  • ... you can apply filters, ways to avoiding certain market conditions, such as ranging markets, to decrease the amount of unprofitable trades.
  • ... you can apply support and resistance levels to highlight a range, and then look for trading opportunities when the price has broken out of that range.
  • ... significantly smaller candles are also an indication that there is no momentum in either direction.
  • ... you can also filter trades by avoiding entries that are too close to a resistance level in a buying opportunity or too close to a support level in a selling opportunity.
  • ... instead you can wait until the price breaks out of the range before entering into the trade.

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  • great article for building on the beginner strategy!! Really useful!!
  • Hey netrogrant, thanks for your feedback! I´m glad you like our lessons. If we can do anything for you, just let us know! smile
  • good things which is must know the new trader.
  • Hi,
    In the article "applying breakout for the Beginner Strategy"
    1 the broken up fractal shows the entering opportunity, so we enter the market at 1(orange color) the last down fractal.
    According to Beginner Strategy we put the stop loss at the top of the broken up fractal i.e 1..
    And when we look at the same chart we will lose this trade as in the grey shaded area the 3rd up fractal breaks the stop loss which is 1. The direction still being down but we lose the trade coz of this 3rd up fractal.
    There will be many circumstances where we can encounter same losing trade, please suggest is there a way out where we don't encounter such losing trade?
  • Hi tanukukreja01
    When you place your pending order (sell stop in this case) you use the broken down fractal (Orange 1 ) as your entry point and you place your stop loss at the top of the last up fractal. This up fractal does not have to be a broken fractal and in fact would most likely not be broken. You then move your stop loss up or down when a new up fractal is formed ( in this case up ) So when the entry point (Orange 1) is broken your stop loss will have moved to the top of the middle up fractal (not the far right as it is not yet confirmed) So you would not get stopped out as you are not in the trade until the long orange down fractal breaks the entry point.
    I hope this is clear and the best of luck
    Why don't you attend our coaching on this very subject tonight at 19.00 GMT/BST ?
    Advanced beginner strategy
  • Ya understood.. Didn't see that the entry is not triggered yet 😁
    I would love to join the coaching but my time zone is very different, it's Singapore so for me it's quite late 😞

    Also I want to brig to your notice that the videos for me are not working I don't wats the reason. It says error in loading the media.
  • good things which is must know the new trader.
  • Outstanding material for creating on the beginner strategy!! Really useful!!
  • netrogrant:
    great article for building on the beginner strategy!! Really useful!!

    yes, this is very and really useful strategy.
  • Near a resistant or support level, how close is too close to it to decide trading past it? Would that depend on the currency?
  • Hi Bsald,
    It depends on the time frame, how wide a certain support or resistance zone is, and the asset as well. For example if you are close (100 pips) to a weekly resistance you can still trade it long on the 1h but maybe not on the 4h or daily. But if the weekly resistance is wide or doesn't seem to be that strong you can maybe even trade it on the 4h.

    It is often a judgment call, and some traders instead of measuring by pips use rather a visual check.
    Hope that helps.
    Regards.
    Peter

    Win trading accounts, sign up now for the tradimo $50,000 Trading Challenge
  • Wish I knew this earlier...
  • Hi Arif,
    You are not late for anything. The real money competition with the prize of managing a $50,000 fund is coming up in November: http://en.tradimo.com/trading-competitions/
  • Hello,
    I have a question on the last chart above. I understand waiting until the price breaks out of the range until entering the trade (shown as 3), but I'm confused as to where the stop loss gets changed to.
    According to a past lesson, while managing the order entry you move the stop loss to the last down fractal. Does that hold true in this example? And with the same logic does the entry price gets changed to the new up fractal that formed a little after the fractal that line 3 is pointing to?
    Hopefully I explained this clearly.
    Thank you
  • Hi Bgalante,
    The stop loss can go either below the most recent down fractal (strict application of the Beginner Strategy rules) or alternatively if you are planning to catch a larger move: below the green support zone. But for simplicity's sake probably best is to stick with the first version and place or trail stop according to the development of fractals.

    As to your other question whether you need to change the entry to new up fractal formations: my answer is no. One of the traps of taking the rules of beginner strategy at face value and rushing to apply it without considering the bigger picture is, that you get chopped up by ranging price action. The reason we want to consider support and resistance because they are better indicators of turning points in the markets than fractals are. Fractals are simply too sensitive and often our eyes are better at spotting key areas. So here in our advanced approach we have actually broken free of fractals in some way and we are looking to trade a breakout of price action and not the fractals. Otherwise it is very possible that the last fractal - your question relates to - gets taken out only for price to reverse sharply posting what would ultimately become a rejection of the red level and a further sell-off.

    Hope that makes sense, let me know if it is still unclear.
    Regards.
    Peter
  • Hi Peter,

    Thank you very much for the reply, that makes perfect sense.

    To build on this, since we are not paying specific attention to fractals here, would you still enter at 3 even if a up fractal did not form, solely for the reason the price broke the resistance? Or is it not a coincidence we are entering at a fractal that broke the range?

    Thank you,
  • Bgalante:
    Hi Peter,

    Thank you very much for the reply, that makes perfect sense.

    To build on this, since we are not paying specific attention to fractals here, would you still enter at 3 even if a up fractal did not form, solely for the reason the price broke the resistance? Or is it not a coincidence we are entering at a fractal that broke the range?

    Thank you,

    It would almost be impossible for a fractal not to form there. Based on the principle of fractals: every major turning point is marked by a fractal, however places where fractals form only rarely become major turning points. So when we use our eyes and judgment to find good levels, fractals become simply 'decorations'. The only use then is to keep our position management systematic by placing the stop to a candle highlighted by a fractal and trailing the stop upon newly formed and confirmed fractals.
  • Why many people don't use stop loss?

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