A Forex Range Trading Strategy

In this article I will show whether it is really true to say that the Forex market ranges most of the time, and if this turns out to be true, whether there is a simple way to exploit this phenomenon profitably with any forex trading strategies, which are also worthwhile.

Trading Trend or Trading Range?

Not all clichés in Forex are necessarily true, but the old line that says the Forex market ranges approximately 80% of the time and trends only during the remaining 20% of the time is true. “Ranging” means just mostly going backwards and forwards between similar price levels. “Trending” means sustained and continuous price movement in one primary direction.

I can “prove” this – as much as you can prove anything using historical market data – by performing a simple back test on the four major currency pairs, using a ridiculously simple trading strategy, and sharing the results with you here.

Let’s say that after every day where the price went up, we sold that pair. Also, after every day where the price went down, we bought that pair. Positions are closed after being open for one day. As we are just trying to use this test to prove a point, and not build a complete trading strategy, we will not worry about trading costs for now. You cannot get any simpler than that.

If the market ranges most of the time, this Forex trading strategy should produce a fairly steady and positive return.

Range Trade Back Test Results

Here are the results that would have been achieved by each of the four major Forex pairs since the beginning of the year 2000, without factoring in any trading costs:

The graphs above show a very clear result: it was theoretically nicely profitable for each pair except GBP/USD. Note also that the upwards curves for the other three pairs slope upwards fairly smoothly. When a trading strategy does this, it is a good sign, because it means that compounding and aggressive money management strategies can be used to maximize profit.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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