The foreign exchange market has various trading strategies every day. Although some strategies are better than others in terms of achieving results, each strategy has its advantages and disadvantages.

While separating wheat from husks, band trading has gained strong support from foreign exchange traders. Some people describe it as the basic form of foreign exchange trading, as positions are not only held overnight, but typically held for more than a day.

This is because most fundamental traders (also known as fundamentalists) are band traders who make changes based on fundamentals, which typically take several days or more to generate profitable price changes.

With band trading becoming a more common strategy in the foreign exchange market, it is necessary to have a deeper understanding of the meaning of this approach. This is the basic strategy behind band trading.

What is band trading?

For traders who use technical indicators that suggest imminent price changes to buy and sell currencies, band trading is a short-term strategy. This trend can span any length of time, from a few days to a few weeks. Band traders attach great importance to technical analysis as a means of tracking currencies and determining when "fluctuations" may occur. Large scale trading usually means that traders do not have to worry about the long-term value of the currency; They just want to profit from the peaks and valleys of momentum.

Look at the peak of NZD/USD prices from their low point on September 2nd to their highest point on September 6th. Despite falling for a month, the four day rapid rise in currency pairs is exactly the trend that band traders are looking for:

You will also notice a brief consolidation period before the price breaks, which is a common indicator used by traders to predict volatility opportunities. In this case, it is not related to the long-term value of the currency pair, but rather the possibility of experiencing rapid price fluctuations in the near future.

Advantages of band trading

On the surface, band trading adopts a comprehensive approach, but no one can avoid the fact that this risk is significant. However, risks come with rewards. Band trading has many key advantages that may make it superior to other popular trading methods.

Flexibility in transaction time

You need to use many trading methods for a long time - long trading hours, long positions, and long-term commitments. Band trading adopts different methods, providing traders with great flexibility. Because you do not want to hold anything for a long time and work from price fluctuations, you have considerable trading flexibility. Jumping between conversations seems feasible, while strictly speaking, day trading is another option. Regardless of your preference for trading time, band trading is flexible enough.

Trading within clear boundaries

Although gray areas may appear in some trading strategies, it is recommended to trade within clear boundaries. Band trading relies heavily on technical analysis, so you can establish more control. The trading strategy that emphasizes long positions provides a lot of space at the border, but band trading can make things easier to read.

Small stop loss

In band trading, your stop loss is very small, especially when weighing against long-term trading. For example, based on a typical four hour chart, the stop loss for band trading may be 100 points, but for a stop loss based on weekly charts and overall positions, you may focus on 400 points.

Considering this, band trading allows you to choose large positions instead of the low leverage impact positions commonly seen in long-term trends.

Potential for entering and exiting the market

Band trading allows you to freely enter and exit the market without making a fuss, so you can discover more trading opportunities. In almost any financial chart, you will see evidence of emerging patterns, but band traders will be seeking support and resistance.

In the NZD/USD example mentioned above, once the currency pair reaches resistance level, you can cash out your profits. Moreover, if you believe that the currency will resume its downward trend, you can even consider shorting the currency pair to profit on both sides of the price trend.

For traders using highly volatile currency pairs, this is a popular strategy. USD/SEK is such a pair, with a large number of peaks and peaks appearing over time

Due to the high volatility of USD/SEK and the accompanying high-risk trading, it is often considered a more "peculiar" currency pair, making it the main area where band traders attempt to profit from sharp price fluctuations.

By entering and exiting the market at the right time, you can eliminate rapid profits and establish other transactions in the process. There are few other trading strategies that allow you to jump in and out of the market like band trading.

The market flows naturally, making it easier to move

The foreign exchange market naturally fluctuates, although it may not seem natural. There is no permanent upward or downward trend.

For example, it is known that AUD/JPY pairing reflects the emotions of global investors. When the global investment market is strong, this pairing often adds value. In contrast, the corresponding price trend of the two reflects a low investment sentiment. By combining this knowledge with other technical indicators, no matter how volatile the market is, you can use currency pairs such as AUD/JPY to leverage these fluctuations.

In the best case, band trading can profit from price increases during bull markets and price declines during bear markets. Band trading does not lock you in any specific market, so you can move with the emergence of foreign exchange markets.

Risks of band trading

Although profits can be found in closing trades, this method also carries risks. The biggest risk comes from the weekend period when the foreign exchange market is closed. Market changes may lead to price gaps and opening at prices significantly different from the closing price, placing band traders in a position where even stop losses cannot protect them from significant net losses.

Band trading also makes traders vulnerable to the adverse effects of market fluctuations, especially considering that volatility trading aims to utilize pullbacks and other short-term price changes, many of which may exhibit significant trends. Although volatility typically provides profit potential for experienced traders, it may increase the risks associated with band trading.

As a result, traders may miss out on profits gained solely by focusing on long-term trends rather than volatility opportunities.

The best indicators used in band trading

The success of band trading largely depends on the indicators you use to identify swing potential. The following are some of the most popular indicators used by band traders:

Moving Average

Although it is best to combine them with other indicators, moving averages (especially long-term moving averages) can help you identify trend reversals indicating volatility opportunities and help you understand the overall strength of the trend.

For example, when the short-term moving average intersects with the long-term moving average, this may be the main signal of trend reversal that band traders are looking for. In the NZD/USD chart below, please note how the 50 day moving average (green) intersects with the 200 day moving average (red), leading to a significant drop in prices. Band traders may be eager to take advantage of:

RSI

The Relative Strength Index (RSI) is an excellent tool for identifying potential volatility trading opportunities based on bearish or bullish settings, especially for traders seeking opportunities in a short period of time.

An RSI above 70 indicates an overbought situation that may lead to a price drop. However, if the RSI is below 30, it may indicate a buying shortage situation where the currency may experience an increase in value.

The following CHF/USD chart illustrates these two types of fluctuations: the oversold situation that works leads to price increases, followed by overcorrection with overbought situations, followed by rapid price declines:

Band traders may open positions on both sides of price fluctuations, profiting from price increases and declines within hours.

Support line and resistance line

If you use Fibonacci or other trading theories, support and resistance lines can help you determine volatility opportunities based on expectations for a pullback or extension.

For example, if you are observing USD/JPY trading within a certain range and the price is close to the resistance line, you may be eager to open a position, hoping that the price will reverse and move towards the relevant resistance line. You can set the stop loss above the support line in case you are wrong, but this simple method can allow first-time traders to trade in bands that can even be profitable.

Long term perspectives are suitable for some traders, but others hope to generate more trading opportunities every day. Band trading achieves this by monitoring market trends rather than just sitting down and waiting for things to benefit you.