FLOORS AND CEILINGS
Support and resistance is the name of the game. In range trading, you are assuming that they will not break. Your trading will be based on the assumption that the range will hold. Range traders want to short at the top and buy at the bottom.
The best tools for range trading indicate when a currency pair may be overbought and oversold. These technical indicators are called oscillators. The oscillator we use the most at FX Bootcamp is the Stochastics. There are many others to choose from. The Relative Strength Index (RSI) is another popular oscillator.
The first step in range trading is to identify support and resistance. These price levels will be the floor and ceiling for price action while we are locked into the current range.
Because you are creating a trade plan based on selling at resistance and buying at support, you are looking for confirmation to do so. Just like any trade plan, you are not going to guess that price will respond to these levels. You are looking for evidence that support or resistance did hold. With evidence, you now have permission to consider a range trade.
The evidence you are looking for, after price is rejected at support or resistance, is a Stochastic cross. They are easy to spot, but some crosses are better than others. Stochastic crosses should be qualified by the oversold and overbought lines. See Figure 13.2.
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