If you trade FX using charts, you are effectively stating that there is memory within price. There is obviously argument to this approach. The argument is that price is completely random and that a group of monkeys could select trades just as effectively as a Harvard business school graduate or somebody on the desk of a major bank. This theory is known as the Random Walk Theory or RWT However, you will realize that the basic tenets of that theory are flawed in that there are patterns and price behavior that is repeatable and once recognized, you can build a trading plan around these common behaviors.
When you spend hours every day looking at global markets whether it is oil, equities, interest rates, or the foreign exchange market you begin to see patterns that play out over and over and over again. While this may not make for a fail proof trading plan the patterns definitely exist and over this month working to be taking a look at two of the most common patterns that price respects and can brought provide good trading strategies for new and experienced traders. First, in this series, we're going to take a look at price ranges over different sets of time and how to trade those ranges. Second, after this series, working to take a look at patterns that play out time and time again that can allow traders to recognize opportunities with the good risk to reward ratio.
Watch How Price Reacts Near Prior High
so the fact that the market and the price of the market over certain fundamental approaches have a repeatable pattern is going to first be explained in terms of price ranges and their significance.
What do we mean by significance? Quite simply, market tends to react definitively from those levels. So we might see price struggle around a level and then take off consistently we might see price struggle around that level and then reverse. Either way it's telling us something. What it is telling us is that the commitment or the conviction that the market has around that price is either struggling or gathering steam which helps us to see as traders whether or not there is an opportunity to trade in the direction of a move or fade a move which is where you look to move against a prior move because there is a lack of confirmation.
What is a price range?
So this series will be talking about price ranges over different time sets. A price range really is one of the more simple technical analysis tools available. A price range is the difference or zone between a price hide in a price low over a given set of time. This is a key tool of technical analysis that traders have used over the decades and that works rather well in FX.
Technical analysis is simply looking at data sets to try and identify an edge over time. Oddly enough, it's not too different than what a lot of companies have been doing now with the increase of technology. A lot of stores like target will look at data from customers all over the world and try and find patterns that they are able to exploit and turn a bigger profit.
What's comical, is that they've even given these types of new positions within companies a fancy name, Data Scientist. What they really are doing is looking for patterns just like you and I are with price in order to find opportunities. The key data point that will be looking at over the next three articles is a price range.
Zones We'll Walk Through
Part I: Opening Range
Part II: Price Range of Prior Extreme Day / Week
Part III: Prior Correction
After you're familiar with these key zones you'll have a distinct edge. The edge will come in being able to recognize key zones that many others often ignore to their own peril. Their oversight may very well become your opportunity.