2009-02-12: Trading trend or range?
Traders often face the important question: to trade trend or range? Traders aim to profit from changes in prices. Buy low and sell high, or sell short high and cover low. Historical charts show us that the energy markets oscillate between ranging and trending modes, resulting in two distinct price properties requiring different mindsets and money management techniques.

Both trend and range markets give traders opportunities for profit. The question remains; how to take advantage of the various market modes to enhance performance?
The simplest identifiers of trend direction are higher lows in an uptrend and lower highs in a downtrend. The goal of trend trading is the same – join the move early and hold the position until the trend reverses. When traders are correct about the trade, the profits can be enormous.

A trend exists when prices keep rising or falling over time. In an uptrend, each rally reaches a higher high than the preceding rally and each decline stops at a higher level than the preceding decline. In a downtrend, each decline falls to a lower low than the preceding decline and each rally stops at a lower level than the preceding rally. In a trading range, most rallies stop at about the same high and declines at about the same low.

In volatile markets, trading with discipline can be extremely difficult. Trading with tight stops can often result in a series of consecutive stop outs before the trader can place a trade with strong momentum and directionality. For this reason many traders also trade range bound strategies. The underlying assumption of range trading is that no matter which way the market travels, it will most likely return back to its point of origin. Range traders bet on the possibility that prices will trade through the same levels many times, and the trader’s goal is to harvest those oscillations for profit over and over again.

Whether a trader wants to swing for homeruns by trying to catch strong trends or simply hit singles and bunts by trading a range strategy, the energy market is well suited for both approaches. As long as the trader remains disciplined about the inevitable losses and understands the different money-management schemes involved in each strategy, he or she will have a good chance of success in the market.

A trader needs to identify trends and trading ranges. It is easier to trade during trends, and harder to make money when prices are flat. Trading trends and trading ranges calls for different tactics. When you go long in an uptrend or sell short in a downtrend, it is vital to not be shaken out to easily. It pays to buckle your seat belt and ride the trend as long as it continues. When trading range, you have to be quick and close out your position at the slightest sign of reversal.

The past is fixed and easy to analyze. The future is fluid and uncertain. You have to base your trading decisions on probabilities in an atmosphere of uncertainty. There is no single magic method for identifying trends and trading ranges. Markets exist in several timeframes simultaneously. Identifying trends and trading ranges is one of the hardest tasks in technical analysis. It is easy to find them in the middle of a chart, but the closer you get to the right edge, the harder it gets.

Systemtrading is a tool that can help you identify opportunities to profit in an evolving energy market. When taking on an objective approach, the interference from disturbing emotions like fear and greed can be reduced. This statistical viewpoint of the market is an aid that makes it possible to make use of diverse strategies developed for different market modes. Models designed and tested for the long and the short side of the market separately is beneficial, and different entry and exit logics developed for different market modes may be a profitable approach to a complex energy market. A combination of range and trend strategies gives the opportunity to diversify risk while trading different market conditions.