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In many quarters, it is said that forex trading opportunities only exist when the market is trending, and we have many forex trading systems for trending markets. However, the truth is that forex trading systems also exist for trading range-bound markets. Indeed, you will be surprised to discover that range-bound markets, or markets in consolidation, present very good trading opportunities.

Range-bound markets usually occur when the market has no pre-defined trend, usually as traders wait for some major news to give them market direction. As such, the currency pair trades in a range, with a well-defined upper limit and a lower limit. Now ordinarily, it is difficult to accurately make out the exact prices that constitute the two extremes of the range spectrum, but application of indicators such as the Bollinger bands will allow the indicator lines to “hug” these levels so that traders can easily make out where the upper and lower limits are.

In a range-bound market, the aim of the trader is to profit from the price range by selling at the upper limit and buying at the lower limit. By reversing from the upper limit of prices and bouncing off the lower limit of prices, clear-cut areas of support and resistance are formed.

One of the forex trading systems that can be used to trade range-bound markets is one based on the Bollinger band. The Bollinger band has an upper, middle and lower band. In this case, the upper Bollinger serves as the resistance point, while the lower Bollinger band serves as the support levels. You can then apply the Bollinger bands to a range-bound currency pair, and you will get possible trade scenarios as depicted on the chart below.

 

Points A, C, E and G mark areas where price retreats from the resistance, and B, D and F mark the support levels at which the price of the currency pair bounces. In order to confirm the signal, the trader can add a momentum indicator that reveals oversold and overbought price levels. The Stochastics indicator does this very well, and can be incorporated into forex trading systems such as this one which need a clear definition of when an asset is oversold or overbought.

So how does this forex trading system work?

For a buy signal, we look for when the price action bounces off the lower Bollinger band at a time when the Stochastics lines cross at oversold levels (defined as a point on the indicator window that is < or = 20). Exit would be at the middle or upper Bollinger band.

For a sell signal, we look for when the price action retreats off the upper Bollinger band at a time when the Stochastics lines cross at overbought levels (defined as a point on the indicator window that is > or = 80). Exit would be at the middle or lower Bollinger band.

Of all the forex trading systems available, this is one of my favourites because it shows a trader exactly when to buy or sell a currency pair and when to exit. No hassles and no stories.