Many pairs have been sat in tight ranges but that doesn't last forever

So far I've spoken about EURUSD and EURGBP that have been walking in a small enclosure and there's a few other pairs also doing the same

AUDUSD is one such example that can't shake itself out from 0.7600 - 0.7800

AUDUSD daily chart

We range trade when the market has found a balance between buyers and sellers. No one wants to push the envelope so the price stays within the range. It also means traders are waiting for a reason to push the market in their favour. Attempts can be made either way but if the news or event is not big enough the opposite side puts a block on the push, the pushers get out, and we move back into the range

So why is trading the break such a good strategy?

When a market breaks it give the impetus to one side and usually results in the collapse of the other. The effect is double what a normal move would be as one is scrabbling to get out while the other is piling in. Either way the trade is the same. On an upside move buyers are buying and shorts are covering

NZDUSD is the perfect example of a textbook break

NZDUSD daily chart

The pair had a fairly wide range of around 500 pips so there was plenty of room to roam. The catalyst was obviously the rate cut from the RBNZ and this put the ball firmly in the shorts court and took the buyers out of the game.

As with all strategies you have to follow the rules. The main reason why you follow the rules is to lower the risk of being caught by a fake out.

There's two main rules I follow for break trading.

  1. Trade the immediate break with a tight stop in case the price moves back through the break point
  2. Wait for confirmation that break is real by looking for a test and hold of the break level

Now following rule number two before entering can mean you miss out if the price doesn't test the level, but instead carries on going. That said, the level can then be marked as a point to watch in the future as it will likely become a strong S or R level.

As we can see with NZDUSD we had a test of the break point and also a trendline that was in the area. Trading off those two points would have seen you turn a good profit for pretty limited risk

The discipline of trading breaks is important though. If you miss it and can't get in at the key areas then don't chase it. Move on and look for a new trade

If there's fireworks tonight there's going to be plenty of breaks happening, and the prices will switch to new plains where new ranges might be set. Once they do then you can start watching for the places to trade the breaks once again