Trading Range Breakouts
The trading range most often will eventually breakout when market forces ultimately overcome either the resistance levels at the upper end of the trading range or the support levels at the lower end of the range.
Once the rate moves through either of these support or resistance levels, a price target for a subsequent move sets up that is equal to the vertical distance between the lines that are projected from the price level the breakout originated from. (Although this does not happen every time there is a breakout)
If the breakout occurs to the topside, you add the measured move onto the breakout rate to get the target exchange rate. You can then use this to your advantage in three different ways:
Buying/Selling on a dip after the breakout since the market often retests the range top or bottom after the breakout depending on if it broke out from the support or resistance.
The above screen shot shows the breakout moving the distance of the range which then continues the sequence below by retesting the previous support line before resuming its breakout.
The first step of range trading is to find the range. This can be done through the establishment of using support and resistance zones. These zones can be created by finding a series of short-term highs and lows and connecting the areas using horizontal lines. Resistance is the overhead range where we will look to sell a range and support is the area where price is held up with traders looking to buy the market.
Below we see an example of a trading range on the USDJPY on a 1 Hour chart. The rate is currently trading between the Support at 122.244 and the resistance at 123.670 Now that price has crossed into this area, range traders will need a plan to sell the pair when the rate is close to the resistance and buy when the rate is close to the support.