Trend and range trading are two completely different trading strategies that call for different sensibilities and money management techniques. You have a trend when an asset’s price is either steadily moving upwards or downwards.
There are a number of ways to determine whether you are observing a trend or not. Bollinger bands are a popular tool among traders for doing just this. Basically Bollinger bands are lines drawn on the upper, lower and midsection of an asset’s chart and are used to indicate uptrends when an asset is moving from the bottom line, or band, through the middle, to the upper band; and downtrends when the reverse is taking place. 20 period simple moving averages are another method of determining trends. If the chart moves above the 20 SMA then you have an uptrend, if below it then you are dealing with a downtrend.
When trading on uptrends you are looking to get in either at the very bottom in order to capitalise on the reversal and the asset’s subsequent rise in value. When trading on downtrends the opposite is true, you want to get in at the very top, or as close to it as possible in order to take advantage of the change where the asset will begin to drop. This is why we use the Bollinger bands and 20 SMA, because these are reliable indicators that an asset is at or close to the bounds or its historic performance and may be ripe for a reversal.
A thing to remember about trend trading is that these trades are generally of a shorter duration. This is because an asset’s career is very much about oscillating between these high and low positions. These oscillations can take place many times throughout the course of a day and so binary traders (who are particularly suited to trading on trends) can repeatedly capitalise on up and downtrends throughout the day, especially with an asset that the market is trading on in a particularly frenzied fashion.
Of course markets do not only move up or down. Sometimes a currency pair or other asset will seem to move sideways, in other words there is not a great deal more buying than selling, or vice versa, taking place and so it appears to be moving laterally rather than up and down. These types of markets are called ranging markets and they typically occur at points when traders are not entirely sure of the position to take. This uncertainty, coupled with a balance of traders entering at either side of the asset causes a sideways motion that some traders can choose to capitalise on. Stochastic oscillators can be used by traders to try and determine whether a reversal is due to take place and on what side of it a trader should get in. Stochastic oscillators don’t follow an asset’s price or the volume of trades placed on it. They work by factoring in the speed or momentum of an asset by calculating its close in relation its high/low range over a number of periods. Momentum tends to change before price and so bullish or bearish movements on an asset can be used to predict imminent reversals.
Ranging markets can be unpredictable and may continue to move laterally for a great deal of time. As such trading on them is more of a long term affair and better suited to traders who like to take the long view.
