Technical Analysis of the Currency Market: Classic Techniques for Profiting from Market Swings and Trader Sentiment

CHAPTER 6

Gauging Range

In the FX market, much as in life, most of the time nothing much happens. Prices meander back and forth as neither buyers nor sellers are able to make much progress. The rough estimate is that 70 to 80 percent of the time prices in the FX market stay in a range. Although these directionless price movements may bore some traders to tears, others build their whole livelihood on this fact. As I've discussed before, range trading requires a completely different set of skills and strategies than trend trading. Fortunately, technicians have a cornucopia of tools at their disposal to effectively analyze and properly trade range-bound markets. The class of indicators known as oscillators provides technically based traders with a set of very valuable clues to price action and helps them anticipate future price moves.

STOCHASTICS

Invented by Dr. George C. Lane, the tool known as stochastics is one of the oldest, yet one the most robust, technical oscillators around. Stochastics—with its Greek-derived name and its arcane parameter nomenclature—can at first glance appear rather obscure and difficult to understand. However, this tool is built on the basic technical premise that as prices rise in an uptrend, the close of each period will approach the high as bulls lift every offer, whereas in a downtrend the close will usually occur near the low as bears hit every bid.

Two measurements, which are normalized and bounded so that their values cycle from 0 to 100, make up ...