If you want to be successful in the forex market for the long term, you need to be able to read the market. You need to understand the behavior of the market in a way. Understanding market movements is a very precise skill that you need to learn and master over time. There are of course many different market conditions to learn of for this purpose, but among the most common are trending and ranging markets.
These two concepts refer to how the marketing is changing and the speed of the change. While they seem similar, they are actually different. It is important to know their differences and choose the most suitable strategies for each of them.
In this article, we are going to talk about the difference between these two market conditions and their role in trading.
What is a Trending Market?
Let’s start with the trending market. When the market is trending, it means the prices are moving in a certain direction and it is clearly understandable from the movement that the prices are going.
For instance, the prices might be moving upwards, which is known as an upward movement. In this form of movement, the prices are registering higher highs and the lows are also getting less and less powerful.
On the other hand, when the market is moving downward, the prices are being registered with lower lows and the highs are also getting weaker and weaker.
So, in a nutshell, when the market is trending, it is very easy to see its movement and trend.
Characteristics of a Trending Market:
We just went over what it means when the market is trending. But if that was confusing for you in any way, let’s break it down even further and take a look at the characteristics that are involved in a trending market:
- Direction
First and foremost, a trending market has a clear direction. It is either moving upward, or a bullish market, or it is moving downward, which is a bearish market.
- Higher Highs and Higher Lows (Bullish Trend)
The features of an uptrend are that it should register higher highs and also higher lows.
This is clearly an indication that buyers are pushing prices upward.
- Lower Highs and Lower Lows (Bearish Trend)
On the other hand, when there is a downtrend, the prices should register lower highs and more importantly, lower lows.
What does it mean? It clearly means the sellers are pushing prices downward.
- Momentum
Another feature of trending markets is that they have momentum. Now you might ask, what is momentum? In very simple terms, momentum is the power of the trend. This is the strength of price movement.
This means, when a trend begins in the market, it will continue forward with some strength. It won’t just stop quickly and shortly. It will go on for a certain period of time with a certain amount of force. That force is the momentum of the trend.
Factors that Influence Trending Markets:
What causes a market to trend? There are different factors that cause a market to trend. The following are the most important ones:
- Economic Factors
Certain economic factors that could induce the market to trend whether upward or downward. For instance, economic reports related to GDP and inflation could drive traders to assume certain positions in the market, creating a trend.
- News and Events
There are certain news and global events that could also cause a trend in the market. But these have to be economically related news or significant global events. For example, results of certain elections or global tensions between various regions or countries could also cause trends to form in the market.
- Market Sentiment
Another significant factor that drives trends in the market is the sentiment of traders. Simply put, sentiment is how traders feel about the market or certain currency pairs in the market. This way traders might rush to take a certain position and cause a trend to form in the market.
What is a Ranging Market?
After that we have talked about what trending markets are, it is time to talk about ranging markets and what they mean in the forex market.
This is kind of the opposite of a trending market and this is when the market does NOT have a clear direction or trajectory.
So, the prices are not necessarily moving upward or downward. In a ranging market, prices are moving sideways and this is exactly what it means for a market to be ranging.
Characteristics of a Ranging Market:
Although saying that a ranging market is a sideways moving market, it is not that simple. Let’s make it more technical and go through the features that are involved in a ranging market.
- No Clear Direction
We said that prices move sideways or horizontally in ranging markets. But how?
The way they are able to register a rather horizontal direction is that they go back and forth between resistance and support levels. This is also known as bouncing between resistance and support levels.
- Support and Resistance Levels
Support and resistance are both crucial and significant factors in a ranging market. As you know, support is the price below which the prices do not fall and resistance is the level of prices above which they also will not go.
In other words, support and resistance levels are well-established highest high and lowest low prices for an asset or currency pair in the forex market.
In a ranging market, prices are too weak and they are not able to break through support or resistance.
- Low Momentum
We just mentioned that prices in a ranging market are not able to break through support or resistance levels. Why?
The reason has to do with the low momentum that the market has. And as you know, momentum is the force of price change. So, when there is not enough force, prices cannot break through certain levels.
- Periods of Consolidation
Ranging markets are defined by periods of consolidation. Consolidation of prices occurs when the market has been through a trend and then prices calm down or take a break from their forceful movement. So, they move sideways for a while before gaining the momentum to form a new trend.
Factors that Influence Ranging Markets:
When can we expect a ranging market? It is important to know the factors that cause a ranging market so that you are prepared for them and can adjust your trading strategy accordingly.
- Market Uncertainty
A prime condition for ranging markets is when the market is uncertain. This is when economic conditions are not clearly pointing toward a certain direction, neither positive nor negative.
So, market participants are not sure which way to turn, whether to buy or sell at large volumes. This indecision will lead to a ranging market.
- Balance Between Supply and Demand
Usually, when there is an imbalance in the supply and demand of a certain asset, it will lead to a bullish market or a bearish market.
But when there is a certain degree of balance between them and neither outweighs the other, it causes a ranging market.
- Post-Trend Consolidation
Another prime condition for forming a ranging market is post-trend consolidation of prices.
As we said, when the market has been through a strong trend, the prices want to take a break and cool down for a while. They consolidate.
Consolidation means the support and resistance levels get closer to each other so they form a rather linear or horizontal movement of prices.
Key Differences Between Trending and Ranging Markets
So far, we discussed the definition of trending and ranging markets. We also talked about their key features and characteristics separately. Now, let’s compare them directly and talk about their key differences with each other.
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Price Direction
- Trending Market
In a trending market, prices have a clear and distinguishing direction, either up or down to form a bullish or bearish trend.
- Ranging Market:
In a ranging market, prices do not have a clear direction and they bounce back and forth between support and resistance levels.
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Momentum
- Trending Market
In a trending market, we have market momentum. This means, prices are able to push forcefully toward a certain direction, whether up or down.
- Ranging Market:
In a ranging market, however, the market does not have enough momentum.
And that is one of the reasons why the prices move sideways and not a clear direction.
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Risk and Reward
- Trending Market
The potential for reward is higher in trending markets as you can capitalize on the trend of the market.
But also, in trending markets a reversal at any point is also possible. So, this means, the risk is also high.
- Ranging Market
On the other hand, risk is lower in a ranging market by comparison. This is because there is not a powerful momentum in the market.
But remember that this also means the potential for reward is also lower.
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Trading Strategy
- Trending Market
Of course, you also need to adjust your trading strategy according to the condition of the market and whether it is trending or ranging.
When the market is trending, you need to use strategies that are known as trend-following strategies. These types of strategies are able to capitalize on the market trend.
- Ranging Market
Contrary to a trending market, when the market is ranging, you need to use strategies that are known as range-bound strategies.
These strategies are able to use small opportunities to buy near support and sell near resistance.
Conclusion
In this article, we talked about the concepts of trending market and ranging market. These are two major conditions that exist in financial markets. It is very important to know the condition of the market in order to use the proper strategy for that condition and gain the most profits. By being able to identify signs for trending and ranging markets, you can increase your chances of success.
