Understanding how to react in different market situations is essential when beginning trading.
So, what’s the secret formula?
Well, veteran traders actually use a variety of trading strategies – not just one!
Getting to grips with these strategies early can put you on a solid path to greater future success.
I admit that, while at first glance, trading strategies can seem complicated…
…don’t let that stop you!
I’ve written this guide on Understanding Trading Strategies for Beginners just for you – precisely to help you get started!
With a little bit of digging into the details, I promise these strategies will quickly become clear…
…giving you that vital edge during your next trading session.
In this article, you’ll explore three essential strategies:
- The Break and Retest Strategy (Understanding flipping supports and resistances and how to follow large trending moves)
- The Breakout Strategy (Learning to capture strong volatile moves with fast profits)
- The Range Strategy (Capturing multiple successful trades of the same levels with precision)
Are you ready?
Then let’s go!
Break and Retest Strategy
What is it about?
The Break and Retest Strategy is known as a Trend Continuation Strategy.
It’s all about entering a trade after the price breaks through a significant level of support or resistance, and then retests that level from the opposite side.
This strategy focuses on the “flipping” of support into resistance – or – resistance into support, depending on the direction of the trend.
You can use it in trending markets, with the aim of capturing a continued trend move.
This strategy helps you identify significant levels in the market while also trading in the direction of the trend.
It also means that by bringing together multiple technical levels into one strategy, you increase the chance of success!
Why use this strategy
Multiple indicators in your favour.
The Break and Retest Strategy offers you a much higher win rate compared to entering trades randomly in an uptrend.
A couple of reasons why this strategy is so effective:
- Identifying Areas of Value: You can actually pinpoint areas where the price has previously struggled and then successfully broken through.
These areas, known as “areas of value,” are critical for making better trading decisions.
- Core Technical Analysis Components: This strategy uses two key parts of technical analysis:
- Breaking through horizontal levels.
- Trading in the direction of the trend.
By combining these elements, you create a really potent trading approach that increases the likelihood of successful trades when used correctly.
Easy to identify and a great foundation for future systems
When starting out in trading, simplicity is key!
Using this strategy means you can easily identify resistance and support levels, as well as work out the current market direction.
Better yet, these concepts are the basis for more advanced trading systems.
Learning about them now lets you improve your strategies over time, laying even more groundwork for future trading success!
Can lead to significant gains
Lastly, the Break and Retest Strategy can lead to substantial profits.
By lining up your trades with the trend, you can benefit from longer price movements over days, weeks, or even months following your entry.
It’s an approach that allows you to ride the momentum all the way to the end trend, maximizing profit!
How it works
So what does this look like exactly?
Resistance Break And Retest:
In the diagram, you can see price moves up and then briefly retraces, right?
This forms what’s called the initial resistance level.
When price comes back to this resistance level, it may be met with some rejection, but eventually price breaks through – with a strong break of the previous high or resistance level.
Price then pulls back to retest the broken resistance level, which now acts as a support level.
This idea works exactly the same for the downtrend example, too…
You can see the price is in a downtrend, forming a low where price bounces…
…the break of support eventually occurs, followed by the retest of the support as a new resistance.
At the retest , it is important to look for rejection candles that tell you price is now rejecting this key level as resistance.
This rejection might appear as shooting star candlesticks or bearish engulfing candles in the critical area.
Finally, the price continues in the trend direction.
That’s the theory of it, anyway!
Now let’s look at some real-world examples and discuss profit-taking and stop-loss placement!
Trading Examples
Take a look at the following chart…
USD/ZAR 1-Hour Chart Retest:
As you can see, price breaks the previous resistance but takes some time before price comes back to actually retest the zone properly.
But when the price does come back, a retest trade opportunity presents itself!
In the USD/ZAR 1-hour chart shown, the candles have begun to stall at the zone and show signs of rejection – this is the opportunity to take a long trade.
You can place your stop loss safely below the zone and then target either the previous resistance or a set reward, in this case, I am using a 2.5RR…
USD/ZAR 1-Hour Take Profit:
…and look at that!
Price stalled at the zone and made its way to the take profit!
This is a great example of how price is drawn to previous areas of value.
By carefully focusing on what price does in these areas, you can better estimate what might happen in the future.
But what if I told you the trade opportunities didn’t end here?
Let’s continue following the price for a bit longer…
USD/ZAR 1-Hour Break of Original Zone:
As you can see on the chart above, price actually returns to the zone again.
There may have been another opportunity to take a long trade here, which is logical.
However, for this example, let’s say you expected this zone to fail because of the speed price returned to it.
Eventually, price breaks below the original zone but, that presents the next trading opportunity!
In fact, the more times a zone is breached, the less significance I give it.
You should always update your zones regularly to match where price has previously reacted!…
USD/ZAR 1-Hour Break and Retest:
Here, the retest and rejection happen when price gradually returns to the zone and is met with a strong bearish engulfing candle.
This candle shows you how sellers are influencing this area, providing resistance.
So for a trade similar to the last one, you could place your stop loss just above the resistance zone, which now acts as the area of value…
…and your take profit could be set around the previous lows…
USD/ZAR 1-Hour Take Profit #2:
Hey, did you see that!?
Price continued its downtrend momentum and eventually reached the previous low target where profits could be taken!
Can you see how this area of value prompted multiple reactions from price?
It’s a great example of why it’s crucial to stay open-minded.
Even if the initial trade doesn’t go your way, carefully watching how price reacts at the new levels can show you new trading opportunities.
I refer to this approach as being “in flow” with the market.
It’s always better to let the market show you its intentions rather than project your expectations onto it!
Let’s examine one last example…
AUD/CHF 1-Hour Chart:
Here is another clear example of price breaking below a clear support level.
Although price has moved a long way away from the support level, let’s look at what happens…
AUD/CHF 1-Hour Chart Break and Retest:
Price grinds its way back up to the zone… where it appears to stall.
Now, similar to the previous examples, let’s place the stop safely above the zone and target the previous low…
AUD/CHF 1-Hour Chart Zone Break:
Hey, hold on!
Price is actually starting to break above the zone?
But what does that mean?
Well, at this point, you have to ask yourself two important questions:
Is my trade unfolding as expected?
Is this zone being respected as resistance?
I hope you answered “no” to both of those questions!
But let’s assume you wanted to let the trade play out naturally…
AUD/CHF 1-Hour Chart Stop Loss Hit:
As expected, the trade did not play out as expected.
Price eventually moved all the way to the stop loss.
So, what’s the lesson here?
Crucially, if the price begins to disrespect the zone you have identified, then you need to reevaluate – rather than hoping the price will turn in your favor!
Over your trading career, you’ll learn that cutting losses early is key to staying in the game and becoming profitable.
In this case, there was an opportunity to exit your trade early – when the price broke above the zone.
I mean, it would result in a smaller loss than if your full stop loss was hit, right?
Always monitor this when planning and executing trades, as not every break and retest trade will be successful.
Now, let’s look at some pros and cons of this strategy!
Pros and cons
Pros:
Clear Levels
This strategy is excellent for beginners because it’s straightforward.
Just focus on support and resistance levels where price has clearly reacted in the past.
It greatly simplifies decision-making.
Trading with the trend
Typically aligned with breakout strategies, trading with the trend means you follow the market’s momentum.
Most setups happen in the direction of the prevailing trend…
…increasing the likelihood of successful trades!
Multiple trade management strategies available
There’s a lot of flexibility in managing trades here.
You can harness new momentum using trailing stop losses or targeting certain take profit levels.
The initial stop-loss placement is clear, too, being based on the identified level.
Cons:
Price might go without a retest
One drawback is that sometimes price may not retest the broken level!
This could lead to missed opportunities at identified key levels.
Rejection at the zone can be subjective
Determining rejection at a zone can vary among traders, leading to inconsistent entries until a trader defines their criteria for rejection.
It’s important to choose your bounds – and stick to them.
Price can fakeout
False breakouts at key levels can occur, where price briefly moves beyond a level but fails to sustain the momentum.
Naturally, this can result in losses if trades are based on these false signals.
Pro Tips
Moving Average Confirmation
It can be a good idea to use the 50-day moving average as extra confirmation of a trend and support/resistance levels.
Although I sometimes use the 50-day moving average, try playing around with different moving averages that make sense to you.
It’s all about the timeframe you are trading!
Volume Confirmation:
Another good idea is to look for increased volume on the breakout and retest to confirm the validity of the move.
Increased volume can suggest that a breakout is not a fakeout – but that there are actually strong forces behind the break of the key level!
All clear? Great!
Now let’s move on to the next strategy: the breakout strategy!
Breakout Strategy
What is it about?
Support and Resistance being Broken and Trading in that Direction
Breakout trading means entering a position when the price breaks through a defined support or resistance level with significant volume.
Once these critical levels are breached, the price is likely to continue moving in that direction, often leading to big price movements.
You can search for these impending breakouts, capturing the momentum and gaining from market shifts!
Momentum and Volatility Can Accelerate the Market
The momentum from breakouts can cause quick price changes, allowing you to profit from short-term market actions.
The increased activity also creates higher volatility, making breakouts popular if you want to benefit from fast market moves.
By capturing these big price changes, you can ride the wave of volatility – and maximize your gains!
This strategy works well in markets with strong movements, where the chance for big price swings is higher.
Why use this strategy
Capture Big Fast Moves
When the price of something breaks through an important level, like support or resistance, it often sets off a flurry of activity in the market.
As a result, prices can shoot up or down, giving you a chance to make a lot of money in a short time.
The longer the price has been stuck in a range, the stronger the breakout tends to be when it finally happens.
Think of it like pressure building up before getting rapidly released, causing the big price moves!
Easy to Identify
Another reason traders love breakout strategies is that is is extremely easy to identify a breakout.
When a price breaks through an important level, like support or resistance with momentum it is often very clear.
This gives the trader a black and white picture of whether price has broken out or not!
Trade setups become easy with clear price points of where the trade would be invalidated and stop losses placed.
How it Works
Price Comes to a Resistance or Support
Breakout trading starts by working out key support and resistance levels on a price chart.
When the price approaches these critical zones, it signals potential areas where buyers (at support) or sellers (at resistance) may become active.
This sets the stage for a possible breakout!
Build-Up Below or Above the Level
Before a breakout, the price often consolidates near the support or resistance level, creating a build-up.
This phase usually displays reduced volatility and tighter price ranges.
On the one hand, in an uptrend approaching resistance, increasingly higher lows signal increasing buying pressure.
On the other hand, in a downtrend nearing support, progressively lower highs signal growing selling pressure.
This squeezing suggests the market is getting ready for a big move, as traders position for an expected breakout!…
Breakout Example:
Strong Candle Break Through
A strong candlestick pattern often signals a genuine breakout, breaking through the established support or resistance level.
This breakout candlestick should be robust and decisive, clearly breaching the key level.
For example, a bullish breakout might be marked by a large green candle closing above the resistance level with minimal wicks…
…indicating strong buyer momentum.
Entry Occurs on the Break of Key Level
Once a strong candlestick confirms the breakout, you can look to enter positions.
Entry is recommended as the price moves beyond the key support or resistance level.
I would strongly consider using a buy-stop or sell-stop order to automate your entry, too…
…once the price reaches your chosen level, you can simply catch the breakout as it happens.
Price Continues Its Strong Momentum in the Direction of the Break
After the breakout, the price often continues in the direction of the initial move.
It’s basically driven by momentum and the influx of traders joining the trend.
This is what can lead to big price movements, with great profit potential.
Use trailing stop-loss orders to lock in profits while allowing the trade to run as long as the trend continues.
Monitoring volume during the breakout can also confirm what’s happening, as higher volume typically comes with more reliable breakouts.
Let’s get into some real-life examples!
Trading Examples
In this example, I have the GBP/CHF 4-hour chart…
GBP/CHF 4-hour Chart Support:
Price has formed a really clear support level – where price continues to bounce.
As you can see, price gradually starts forming lower highs into support.
This suggests price could soon potentially breach the zone…
GBP/CHF 4-hour Chart Support Weakening:
Again, as price returns to the zone, it becomes clear that this support level is struggling to keep the sellers at bay…
GBP/CHF 4-hour Chart Support Breaks:
Eventually, support breaks and the following candles show some attempt to get back above the zone or at least hold the zone.
At this stage, what should you do?
OK, I think I know what you are thinking!
“Rayner, let’s sell – RIGHT NOW!!”
Although that wouldn’t be a terrible idea, with breakout strategy, I prefer to get some extra confirmation in the form of… momentum candles!
Without confirmation, this could just be a brief fakeout before the reclaim of the support level, so let’s take a look…
GBP/CHF 4-hour Chart Entry:
Right!
Now you have crystal-clear confirmation that price has broken support and the sellers are in control.
So let’s take a trade and target a 2RR!…
GBP/CHF 4-hour Chart Take Profit:
Congratulations!
The price continued its momentum and went straight to the target on the next candle!
Can you see how once a flood of selling pressure was confirmed, price then carried on with that momentum?
It created what some would call an aggressive downward move…
…and it’s precisely these types of moves a breakout strategy aims to capture.
Let’s take a look at another example…
GBP/CAD 4-Hour Chart:
Just like in the previous example, you can see a clear resistance level has formed…
…and price has rejected this zone multiple times.
Look at what happens next…
GBP/CAD 4-Hour Chart Build-Up:
As price approaches the zone again, can you see how price has formed a “build-up” near the resistance level?
It’s followed by a strong bullish candle into the zone, which could mean a breach is nearby…
GBP/CAD 4-Hour Chart Entry:
There! You see the clear break of resistance with relatively bullish candles!
In this example, the price closed above the zone for two additional candles.
Usually, you would place the stop loss below the zone…
…but this time, let’s take a different approach to the take profit…
GBP/CAD 4-Hour Chart Trailing Stop:
As the price moves up from your entry point, think about trailing the stop closely behind the small 4-hour swing lows – you can find them by looking for hammers or momentum candles.
This approach keeps profits secure while staying out of the way of the trade…
GBP/CAD 4-Hour Chart Moving Trailing Stop:
Each line represents where you could move your trailing stop as price pushes off from the previous swing or low.
By the way – how you identify swings is entirely up to you!
Some traders might take a less aggressive approach, while others might base it on risk-to-reward levels.
I encourage you to try them all out with this form of profit-taking to see what suits your setup best!
As for the current example, look at what happens next…
GBP/CAD 4-Hour Chart Take Profit:
As you can see, the price eventually shifted back towards the previous low, stopping you out, but not before capturing an impressive move!
Let’s look at one last trade!…
GBP/AUD 4-Hour Chart Setup:
Just like in the previous examples, you can see the price has reached a resistance level and started forming a build-up.
In fact, this trade looks like it’s ready to break out, doesn’t it?
Strong bullish candles into the zone…
…followed by the breach of the zone…
…with another strong bullish candle?
Let’s take the trade!…
GBP/AUD 4-Hour Chart Entry:
As before, you can set your stop loss just below the zone, and again, let’s try to capture profits with a trailing stop!…
Oh no!
The price initially moved in your favor, but before you could move your stop to your expected take profit, heavy bearish momentum came in and stopped you out!
Disappointing, right?
So, what’s the lesson here?
It’s the same as with any strategy:
Breakout trading won’t work 100% of the time!
Fakeouts do happen, and it needs to be something you factor in – and even expect – when taking these sorts of trades.
The logic behind this trade made sense, and you followed the strategy exactly as you were supposed to…
…things just didn’t work out as expected this time – and it happens!
Don’t get caught up on individual trades, reset for the next one instead.
Limitations
Fakeouts Can Occur
As you just saw in the previous example, breakout trading carries the risk of false breakouts, also known as “fakeouts.”
These occur when the price moves beyond a support or resistance level but fails to continue in that direction.
This can lead you to enter positions too early, only for the price to reverse shortly after.
Fakeouts often result from low trading volume or temporary market fluctuations that don’t indicate a real change in market sentiment.
Hard to Enter a Trade if Price Moves Too Far from the Area of Value:
Another challenge with breakout trading is entering a trade after the breakout has happened.
If the price moves too far from the breakout point, it can create a large stop-loss distance, making the trade riskier and less appealing.
You might end up chasing the price, which can lead to poor entry points and higher risk…
…or miss the trade entirely if you wait too long for a pullback that never happens.
Watch your entry timing.
Hard to Determine Take Profit Levels:
Setting take-profit levels in breakout trading can be tricky!
I mean, it’s difficult to know how far the price will move after a breakout, which can make it tough to choose the right exit points.
If you set the profit target too low, you might miss out on bigger gains…
If you set it too high, the price might never reach it…
It requires a careful balance between risk and reward, using critical risk management techniques like trailing stops.
Pro Tips
Build-up Before the Explosive Move
Recognizing the build-up phase before a big price move is important for successful breakout trading.
This build-up happens when the price stays within a narrow range, leading to smaller and more frequent candlestick patterns.
It’s a phase that reveals the balancing act between buyers and sellers, creating pressure that can lead to a significant breakout.
Crucially, during longer build-ups, stop orders accumulate above resistance and below support levels.
When the price finally breaks out, these stop orders trigger, increasing trading volume and amplifying the price movement in the breakout direction.
It’s known as the “spring-loaded” effect: the longer the price stays in its build-up phase, the more powerful the breakout can be.
Strong Candlesticks at the Top of Resistances
Strong candlesticks at resistance levels are key signals when analyzing breakouts.
Long-bodied bullish candles or patterns like the engulfing pattern show strong buying momentum.
When these candlesticks appear at resistance levels, it suggests buyers are overcoming selling pressure, making a breakout more likely.
These strong candlesticks also often come with increased trading volume, confirming the breakout’s strength.
Look for these signals in your strategy, as they indicate a higher chance of the price continuing beyond the resistance level.
Placing stop-loss orders just below these candlesticks can also help manage risk while still capturing the big upward movements!
Wait for Close Confirmation on the Break
Another useful tip is to wait for a close confirmation on the break.
While setting a buy or sell stop can ensure you enter on the break of the key level, this method can sometimes trap you in fakeouts, where the price wicks above the zone briefly but then ultimately closes below the zone.
To avoid this, consider taking a more hands-on approach and waiting for the candle to close below or above your key area of value.
This approach gives you a clearer understanding of where the market is headed and how strong the break actually is.
It’s all about making more informed trading decisions and reducing the risk of falling for fakeouts!
So with breakouts covered, let’s move on to the last of the three strategies…
I introduce you to… the range trading strategy!
Range Trading Strategy
What is it about?
The range trading strategy is one of my favorite strategies, as it is both simple and extremely effective if executed correctly.
Range trading is useful when the market is not trending in any particular direction.
Instead, it’s coasting along… in either accumulation or distribution.
The general idea of range trading is to find the highs and lows of the range and execute trades off those key areas of value.
In the end, the range will break, but not before multiple trade opportunities show themselves!
Why Use This Strategy
Simple To Identify
Range trading is one of the easiest strategies to understand and carry out, making it great for beginner traders.
Most novice traders can identify clear support and resistance levels where the price has repeatedly changed directions, setting the boundaries of the range.
This approach allows you to focus on crucial price levels and make decisions without unnecessary complexity.
Clear Targets and Stop Losses
Another benefit of range trading is how easy it is to set precise profit targets and stop losses.
Since this strategy operates within clearly defined limits, you can…
…set your profit targets at the opposite end of the range from your entry point and…
…place stop losses just outside the range boundaries.
This clear definition of risk and reward helps you keep a favorable risk-to-reward ratio.
Having these exit points also helps remove emotional trading decisions, encouraging you to keep to the strategy even during volatile market conditions.
Reliable in Range-Bound Markets
Markets often spend a long amount of time in range-bound conditions, especially during periods of low volatility or when there is nothing happening to drive a trend.
It’s a common situation, right?!
This makes range trading a great strategy that can be used repeatedly over long periods.
It’s even possible to capture multiple trades off the same trading range over the course of weeks or even months!
This consistency is better if you prefer steady, predictable trading environments rather than the uncertainty that comes with trending markets.
How it works
Identifying a Range
To identify a range, look for areas on the chart where the price consistently bounces between two horizontal levels.
These levels act as psychological barriers where buying and selling pressures are roughly equal…
Range Example:
By recognizing these patterns, you can work out the boundaries of the range and prepare to trade within them!
Targeting Highs and Lows
Once you’ve found your range, you need to buy at the lower boundary (support) and sell at the upper boundary (resistance).
The key is to enter trades as close to the extremes of the range as possible – maximizing potential profit while minimizing the risk.
It’s all about profiting from price movements cycling between values within the identified range.
Entry and Exit Points
So you found your levels – what next?
Well, when the price reaches the support or resistance levels, the first thing is to confirm the reversal through candlestick patterns or other technical signals.
Tight stop losses can be placed just outside the range boundaries to protect against false breakouts.
Meanwhile, profit targets are set at the opposite end of the range to capture the entire price movement from support to resistance, or vice versa!
It’s the clear definition of entry and exit points that helps maintain discipline and consistency.
Trading Examples
Let’s take a look at some real examples to really capture this concept!…
AUD/USD 1 Hour chart:
Here you can see a clear downtrend on the AUD/USD 1-hour chart.
Price has dropped to a level where it appears to be consolidating – falling within a range.
You can see it as price bounces between the newly formed support level and multiple rejections at higher levels.
Given this setup, I’d say it’s OK to assume that price could stay within these boundaries…
…and it’s here the repeated rejections at the support level suggest potential trading opportunities!
If price rejects again from this support level, it might be worth thinking about a trade, right?
I mean, if it’s bounced there before, it could well bounce there again.
Let’s try and work out the potential entry and setup for this trade…
AUD/USD 1 Hour Chart Entry:
Look at how price returns to the support level where rejection candles form, indicating potential buying interest.
For this situation, place your stop loss below the support level and take profits at the closer boundary of the resistance to prevent any front-running…
AUD/USD 1 Hour Chart Take Profit:
And what do you know!
Price successfully rebounds from the lower boundary and reaches your profit target!
Now, what’s great about this setup is that it already presents additional trading prospects.
For following trades, consider waiting for candles to show rejection at these two zones before entering positions, rather than relying solely on buy or sell orders at these levels.
The diagram below shows how the range might develop over time…
AUD/USD 1 Hour Chart Range Trades:
See how waiting for price to reject the levels gives you the chance to capture more of the move?
It also gives you the space to wait for the right time to enter the trade, minimizing the risk of entering before a fakeout or if price is ready to break through.
And the beauty is, even when the range eventually breaks, if you lose one trade, it just becomes the cost of trading the range.
With the 5 to 7 successful trades beforehand; the one loss is simply part of the process!
Let’s take a look at another example…
AUD/JPY 1-Hour Range Chart:
Again, you can see price in a downtrend that makes an initial low.
Next, price comes back up and forms a high followed by a new low.
These are the boundaries you need to identify to trade within!…
AUD/JPY 1-Hour Range Entry:
Just like last time, you can enter when price rejects the zone.
Simply place your stop loss above the zone and target the top of the support zone for take profit…
AUD/JPY 1-Hour Range Take Profit:
As price moves away from the range high, it quickly heads towards the range low, presenting a new opportunity to enter a long position from the bottom of the range…
AUD/JPY 1-Hour Range Trades 2 and 3:
The next trade takes a bit longer to play out, even coming back to test the support zone again before returning to the range high…
But at this point, you can have confidence in the boundaries of the range – so continue trading it with conviction…
AUD/JPY 1-Hour Range Completion:
Over time, more opportunities for range trades emerge until, eventually price breaks through the top level instead of rejecting it.
So, this marks the completion of the range!
It’s signalling that it’s time to either seek other range trades on other pairs or adopt a different approach in this market. (breakouts, maybe?)
All good so far?
Let’s examine an example with a reality check…
USD/CHF 1-Hour Range Example:
Just like in previous examples, you can see that a range has formed on the USD/CHF pair.
Despite a large wick that pierced through the upper boundary, price still showed rejection, keeping within the defined upper and lower boundaries.
So far so good, right?
Let’s assume you took a trade from the first opportunity at the range low…
USD/CHF 1-Hour Range Entry:
As you can see, the first trade would have taken some time but eventually reached its target.
Price then started to reject the top of the range, offering another trade opportunity…
However!
Price never retraced back to the range low…
Although the trade initially moved into profit, price gradually climbed back up to the top of the range.
Can you see a buildup before price breaks through the range high and continues in an uptrend?
At that point, it’s time for an early exit from the trade!
With that in mind, let’s discuss some limitations.
Limitations
Can Take a Long Time to Unfold
Range trading strategies demand some serious patience!
These trades rely on price moving between support and resistance levels… but they can sometimes take their sweet time to get there.
It means you have to be prepared for potentially long holding periods, and price may sometimes go in favor or against your positions – on a daily basis, even.
It’s crucial to resist the temptation to make impulsive trades outside the established areas of value.
Always bear in mind that patience is often rewarded with higher accuracy and lower-risk trades.
May Not Reach Profit Targets
Another limitation of range trading is the possibility that price movements might not reach the profit targets you think they will.
It could be because of what traders call “front running,” where traders exit their positions slightly before prices hit support or resistance levels.
In these cases, you may be required to adjust your strategies by setting more conservative targets.
Trailing Stop Loss Limitation
While using a trailing stop loss might seem like a straightforward solution to being front-run at the highs and lows of the range, it can be challenging in practice!
In real-world trading, prices often fluctuate in both directions as they move toward key areas of value.
Although a trailing stop can lock in profits, there is always a risk that it will do so prematurely, limiting your ability to get the best risk-to-reward ratio.
Pro Tips
Candlestick Patterns
Candlestick patterns play a crucial role in working out possible reversal points at range highs and lows in range trading strategies.
Look for specific patterns like doji, engulfing patterns, or hammer patterns near the range boundaries.
For instance, a doji candlestick forming at a range high followed by a bearish engulfing pattern might indicate indecision among traders, followed by bearish momentum.
This increases the probability of a reversal in price movement, signalling a potential opportunity to sell.
Conversely, a hammer pattern appearing at a range low could suggest a bullish reversal, presenting an opportunity for buying.
Technical Indicators
Technical indicators such as the Relative Strength Index (RSI) and the Stochastic Oscillator are also great additions for range traders.
These indicators measure the momentum and strength of price movements, and they can help you work out overbought and oversold conditions within the range.
When the RSI or Stochastic Oscillator reaches extreme levels (e.g., above 70 for overbought or below 30 for oversold), it serves as a confirmation signal for potential reversals.
For instance, if the RSI indicates overbought conditions as the price gets closer to the upper boundary of the range, it strengthens the chance of a reversal and might mean it’s time to sell!
Adding these technical indicators to your analysis improves the accuracy of your entries and exits, making your range trading strategy more effective.
Conclusion
In conclusion, understanding trading strategies is not just about learning techniques; it’s about building a solid core for your success in the markets.
Throughout this article, you’ve explored three essential trading strategies:
- The Break and Retest Strategy
- The Breakout Strategy
- The Range Strategy.
You’ve learned how the break and retest strategy provides extra confirmation before a potential trend continuation, offering great risk-to-reward opportunities…
I discussed how volatility and momentum in the breakout strategy enable you to capture strong moves quickly…
Finally, you saw how to analyze the range strategy, allowing you to trade the markets when they aren’t trending, and capturing multiple successful trades off the same level…
So now you have a strategy for all market conditions – what are you waiting for?!
Remember, mastering trading strategies takes practice and adaptation to market dynamics.
With all that said, did I miss anything?
Or do you have experience with these strategies already?
Share your thoughts in the comments below!
