Contents
Today we will talk about ranging markets. The market is in constant motion. The prices of the underlying assets rise and fall. Nevertheless, we can distinguish two main market phases: trending and ranging.
In the trending market, we can notice a general upward or downward movement of the price. It does not mean the price will rise permanently during the uptrend or fall during the downtrend. The moments of price correction will occur. However, you will be able to indicate a general trend. And this is when you want to open trading transactions.
On the other hand, the market will sometimes go into the ranging phase. You should avoid trading on such occasions so you do not lose your money.
Key Takeaways🔑
| →Ranging markets can be challenging to trade due to their unpredictable nature. |
| →Indicators such as EMA200 and ADX can help identify ranging markets. |
| →Trading in trending markets is generally considered more favorable than ranging markets. |
A few ways to avoid ranging markets on IQ Option
In order to be able to avoid something, you must know what it is. So the first step is to learn how to identify ranging markets. It will be helpful to use an indicator here.
Using Exponential Moving Average to detect ranging markets
Go to the indicators icon and choose the Exponential Moving Average. Set its period at 200. You will see its line plotting over the price bars. The moving average is probably the best indicator for ranging markets.
EMA's slope for detecting ranging markets
Only by observing the EMA's line, you can deduce whether the market is trending. When its slope is significant, it means the trend is strong. When the indicator's line is rather flat with small up and down movements, you can assume the market is ranging.
Price distance
Look at the chart and check where the price lies in relation to the EMA200. In the trending market, it will be rather further away. It may come closer to the indicator's line but then it is important how long it stays near it, whether the price touches or crosses the EMA or whether it is kind of repelling it. When the price bars develop in the EMA's line proximity and over it, the market is rather ranging.
Using Average Directional Index to detect ranging markets
Another indicator that might help in identifying the ranging market is the Average Directional Index. In order to add it to your chart, click on the indicator's icon and find its name. It will appear in a separate window beneath the price chart. The settings should be left as default. It is safe to say that the ADX is a ranging market indicator, as it does a great job of detecting the phase of the market when it is moving in a sideways trend.
The ADX tells us that the market is trending when its line is situated above a certain number. When the indicator's line is plotted below this level, we can presume the market is in the ranging phase.
Now, these numbers might vary but usually, they are 20, 25 and 30.
Pros and Cons📊
Pros:
- 💡 EMA200 and ADX indicators can help traders identify and avoid ranging markets.
- 💡 Trading in trending markets can offer greater predictability and potential profits.
- 💡 Multiple assets can provide alternative trading options when a market is ranging.
Cons:
- ❌ Ranging markets can be difficult to navigate, leading to potential losses.
- ❌ It may not be possible to avoid all ranging markets, even with the use of indicators.
- ❌ Traders may need to adapt their strategies for ranging markets, which can be challenging.
| Trending Markets | Ranging Markets |
|---|---|
| Greater predictability and potential for profits. | Unpredictable price movements, making it harder to profit. |
| Easier to identify using technical indicators. | Technical indicators may be less reliable in identifying and trading in ranging markets. |
| Traders can focus on following the trend for higher probability trades. | Traders may need to use ranging market strategies, such as trading support and resistance levels. |
Summary
It is always more beneficial to trade in the trending markets. So my advice is to stay out of the range. As I have pointed out in the article, it might be wise to use indicators' help. The Exponential Moving Average with the period of 200 and the Average Directional Index will both work well for this purpose.
It is also a good idea not to limit yourself to one instrument. Choose multiple assets so in the case of the ranging market, you are not out of trading options. You would simply trade other instruments and go back to the first one when the circumstances change in your favour.
And be kind to yourself. It is probably not possible to avoid all ranges and you will likely take some losses during these periods. Do not give up and in case of any doubts, you may test your strategy in the IQ Option demo account.
Of course, it is not necessary to avoid the sideways trend. In such a phase of the market, you can use some ranging market strategy. Even in a sideways trend there are short directional movements most often being multiple alternating bounces from price supports and resistances.
Many successful trades!
Q&A💡
- Q: How do I identify a ranging market?
- A: You can use technical indicators such as EMA200 and ADX to help identify ranging markets. EMA200 with a flat slope and price bars developing near the EMA line indicate a ranging market. ADX values below 20, 25, or 30 can also indicate a ranging market.
- Q: Is it better to trade in trending or ranging markets?
- A: Generally, trading in trending markets is considered more favorable due to their greater predictability and potential for profits. However, some traders may develop strategies specifically for ranging markets.
- Q: Can I completely avoid ranging markets?
- A: It may not be possible to completely avoid all ranging markets. However, using indicators and monitoring multiple assets can help you minimize your exposure to them.
- Q: What strategies can I use to trade in ranging markets?
- A: In ranging markets, you can focus on trading support and resistance levels, as prices tend to bounce between these levels. Be cautious and ensure you have a well-defined risk management plan in place.
- Q: How can I minimize losses during ranging markets?
- A: You can minimize losses during ranging markets by using indicators to identify and avoid them, diversifying your trading assets, and having a solid risk management plan in place.