Everyone who looks at a Forex chart spanning longer periods, like the D1, notices two common features, which is price action either moves generally in one direction, known as trending, or bounces between two well-established levels, support, and resistance, known as ranging.
Knowing if a Forex pair is trending or ranging is crucial to the success of profitable Forex traders, as each market condition requires a different strategy and suggests which trading methodologies to best avoid.
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What is a Range in Forex Trading?
A ‘range’ in Forex trading refers to a horizontal price channel a pair might establish.
The support level is the lower boundary of the range from where price action may typically reverse higher, and the resistance level is the upper boundary of the range, which could reject further higher movement of price. While a Forex trading range can materialize on any timeframe, using longer ones, like the H4 or D1, usually yields more accurate results.
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How to Identify a Forex Trading Range?
Traders can use a Forex chart to help them identify a potential trading range. Connecting clear timeframe highs and lows with a horizontal line can define the establishment of a trading range, and it typically requires at least three datapoint confirmations to form valid support and resistance levels.
Most traders will buy once price level reaches the support level and consequently sell at resistance, but they should consider potential for range breakouts and breakdowns, including ‘false’ ones.
Some Forex traders may prefer to draw a third line in the middle of the range and use a breakout above this level as a buying opportunity and a breakdown below it as a sell signal. However, traders should realize that a trading range does not in itself present an automatic trading signal but serves as another indicator for which trading strategy to use, to be considered alongside other aspects of technical analysis.
Which Forex Pairs Range the Most?
Any Forex pair can form a trading range, but some pairs historically tend to range more than they trend, and they often establish well-defined support and resistance zones. Currency crosses, often those without the US Dollar as a quote or base currency, tend to be the more reliable currency pairs for traders who seek range-trading opportunities.
Here are the Forex pairs which are widely considered best for range trading:
EUR/CHF - The EUR/CHF was the best range trading instrument until 2015 when the Swiss National Bank de-pegged the Swiss Franc from the Euro. The EUR/CHF still ranks amongst the best range trading Forex pairs, as the Swiss and the Eurozone economies share many similarities, like a conservative fiscal approach and trade and budget surpluses. The Swiss Franc is also considered a classic safe-haven asset and indirect commodity currency, which adds to its appeal for traders seeking breakout when there is a global ‘risk off’ environment when markets are fearful.
EUR/GBP - The EUR/GBP offers higher liquidity and ranges more than it trends, despite the post-Brexit fallout. The UK is home to the most dominant Forex market, accounting for the bulk of daily transactions, and both regions are core trading partners for each other with an often-similar approach to monetary policy.
AUD/NZD - The AUD/NZD emerged as the leading range-bound currency pair. Both economies are heavily intertwined and are commodity exporters but do not compete for the same commodities. This currency pair establishes clear trading ranges, making it ideal for beginners and seasoned traders due to its comparative low volatility.
AUD/CAD - The AUD/CAD Pair pitches two commodity exporters against each other, and while Australia and Canada export different commodities, both are known as hard commodity exporters, those mined or extracted, and commodity prices are the third variable in this currency pair. Commodities remain priced in US Dollars, and the bulk of contracts are settled in US Dollars, adding an interesting fourth variable for range traders to evaluate.
NZD/CAD - The NZD/CAD is like the AUD/CAD, but New Zealand exports soft commodities, those raised and harvested, which offers a different commodity twist.
USD/JPY - The USD/JPY is one exception to the currency cross rule. Both currencies are seen as a safe-havens and historically this pair has been the primary currency pair for carry trading due to the interest rate differential between them, JPY having constantly lower central bank base rates than USD, which can lead to well-established ranges being formed to take advantage of.
Bottom Line
Determining whether a currency pair is trending or ranging is one of the most fundamental aspects of trading Forex profitably.
Forex traders can use appropriate strategies and define risk management profiles depending on underlying market conditions. The best Forex pairs for range trading are currency crosses, which typically exclude the US Dollar. The EUR/CHF and the AUD/NZD are the two leading currency pairs for range-bound markets, but traders can use technical analysis alongside geopolitical events to identify others.
