The same sort of tendency toward equilibrium , however, cannot be said for stocks of similar nature. It is quite easy to imagine how, say, General Motors could file for bankruptcy even while Ford and Chrysler continue to do business. Because currencies represent macroeconomic forces, they are not as susceptible as individual company stocks to risks that occur on the micro-level. Currencies are therefore much safer to range trade.
Nevertheless, risk is present in all speculation , and traders should never range trade any pair without a stop loss. A reasonable strategy is to employ a stop at half the amplitude of the total range. In other words, if this pair reached 1. Interest rates are the reason there's a difference. The interest rate differential between two countries affects the trading range of their currency pairs.
However, for the period represented in Figure 6, however, the interest rates in the U. K are at bps while in Japan—which is gripped by deflation —rates are 0 bps, making a whopping bps differential between the two countries. The rule of thumb in forex is the larger the interest rate differential, the more volatile the pair. To further demonstrate the relationship between trading ranges and interest rates, the following is a table of various crosses, their interest rate differentials, and the maximum pip movement from high to low over the period from May to May While the relationship is not perfect, it is certainly substantial.
Note how pairs with wider interest rate spreads typically trade in larger ranges. Therefore, when contemplating range trading strategies in forex, traders must be keenly aware of rate differentials and adjust for volatility accordingly. Failure to take interest rate differential into account could turn potentially profitable range ideas into losing propositions.
The forex market is incredibly flexible, accommodating both trend and range traders, but as with success in any enterprise, proper knowledge is key. Department of the Treasury. Accessed Jan. International Monetary Fund. Global Pro Services. Sunshine Profits. Blackwell Global. Bureau of Economic Analysis. Trading Economics. Simpler Trading. KVB Prime. American Express. Your Money. Personal Finance.
Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. The Major Currency Pairs. Significance of the Long Term. Commodity Block Currencies. Crosses Are Best for Range. Interest Rates. Key Takeaways The forex market is driven by macroeconomic trends that can sometimes take years to play out. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts.
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