Should you trade trend or range is one of the biggest questions to address when creating your trading plan. This is a question that requires research and evaluating your personality and what risk level you can handle. The factor that influences this decision the most is the price environment. Once you access the price environment you will increase your chances of success. Then you must choose which mindset and money management technique best matches yours.
Trend trading is determined by watching for highs in a low trend or lows in a high trending market. Some traders define trend by watching the “Bollinger Band” and they look for a deviation from the range that they are watching. Others watch the Simple Moving Average very carefully and consider a trend to be when there is a slope either upwards or downwards over a 20 period chart.
The is to join early on in a trending move of the market and hold the position until the trend reverses. The trend trader assumes the market will continue in its present direction. Trend traders usually trade with tight stops to limit their potential losses. If the trend does not continue they need to get out fast, limiting their losses.
Just like the potential for losses is tremendous in trend trading, the potential for profit is too. If a trend trader is correct in his hunches, and uses leverage of 1:100 or 1:200, they can double their money relatively quickly. Often they have to jump in and out a few times to get what they are really looking for.
Trend trading is not for the inexperienced trader, or traders with little discipline. To be you must have an incredible amount of discipline and willingness to stick it out as long as it takes to work.
Many traders use range based strategies instead of trend based ones because they require less risk taking. This type of trading means looking for currencies that are trading in channels, buying at the low end of the channel and selling at the higher end. Range trading assumes countertrends so in a way it is still a trend based philosophy.
Instead of looking for just the right point of entry, range traders look to build a trading position. This is a longer term trading strategy and it is recommended to use limited leverage when trading with the range. It is also recommended to trade in mini lots when using this strategy, and make sure to use a brokerage who does not charge commissions. A range-trading plan can be implemented with more smaller trades.
When deciding which strategy to use, make sure you have a full understanding of both money management theories and implement the one that works for you. There is room for profit in the Forex market with either strategy as long as you use it correctly and use stop losses to your benefit.