Thoughts from the Trading Trenches
17 Years ago | August 01, 2014 12/2/23, 12:00 AM
In the August issue:
- Forex Trading Outlook for August 2014 (Video Update)
- 12 Strategies I Use to Trade in a Low Volatility Market
Forex Trading Outlook for August 2014 (Video Update)
There is a battle currently going on between markets that want to see cenbtral banks normalize monetary policy (i.e. raise rates) and central banks (i.e. Fed and BOE) who are in no rush to comply. How this plays out will affect all markets. This also leaves us in a data dependent market.
12 Strategies I Use to Trade in a Low Volatility Market
I have been trading the forex market for a very long time and have never experienced an extended period of low volatility such as what has gone on since the start of the year. I wrote about this a few months ago in an article and have updated it as volatility has continued to decline. While this has made it difficult for just about everyone trading the forex market, there are strategies you can use to trade this type of market that I outline below:
If you are trading the forex market on a daily basis, it is hard to not recognize the lack of volatility that has frustrated not only day traders but trend traders as well. Look at the major currencies (see below), there is not one that has an average range anything close to 1% per day. If you factor out the occasional news driven volatile days, the average trading range per day is even tighter. There is more volatility in crosses but even in those pairs, it is relatively calm by historic standards.
Average range per day in pips (%)
|
|
EURUSD |
USDJPY |
USDCHF |
GBPUSD |
USDCAD |
AUDUSD |
|
5 days |
39 (0.3%) |
41 (0.3%) |
31 (0.3%) |
58 (0.3%) |
56 (0.5%) |
49 (0.5%) |
|
30 days |
46 (0.3%) |
37 (0.4%) |
35 (0.4%) |
64 (0.4%) |
61 (0.6%) |
55 (0.6%) |
|
90 days |
56 (0.4%) |
47 (0.5%) |
44 (0.5%) |
68 (0.4%) |
51 (0.5%) |
59 ().6%) |
|
200 days |
62 (0.5%) |
63 (0.6%) |
56 (0.6%) |
85 (0.5%) |
61 (0.6%) |
72 (0.8%) |
So, the question is, how do you trade a low volatility market? Without getting into a long discussion, here are some strategies I use to trade in this type of market.
1) BE REALISTIC. Identify the type of market you are in and take what the market will GIVE to you, not what you HOPE it will give to you
2) BEWARE OF TRADING OUT OF BOREDOM or otherwise called punting (i.e. trading for the sake of it without a strong view)
3) In low volatility markets it is hard to make losses back so BE SELECTIVE and look to trade the strong side of the market, which I define as the side where there is less chance of getting caught in a run through stops.
4) Look to trade when you can IDENTIFY A STOP that gives you staying power (see my article Avoid Dumb Trades and Dumb Stops). STAYING POWER is a key in low volatility/tight range markets as there is a good chance that you will at least see your entry level again if you miss time your trade but are trading the strong side of the market
5) The forex market has an INSATIABLE QUEST to run stops. Currencies will settle into tight ranges when there are NO MORE STOPS to run for the day.
6) STAY ALERT! Treat the average day as a range market but beware of those days where there is news that can shake the market out of its slumber. Don't trade a range day when news and/or technicals suggest otherwise.
7) NEWS MATTERS! Look ahead to what news is coming out as that will give you a clue what will be the strong or weak side ahead of a key news event. It is often safer to trade in anticipation of how the market will position itself ahead of a news event rather than trying to trade on the actual outcome.
8) LOOK TO TAKE PROFITS SOONER in a low volatility market than when markets are trending and there is strong momentum.
9) BEWARE OF TIGHT RANGES as small moves within it can exaggerate a swing in your sentiment and lead to ill-advised trades based on emotion.
10) TRY REPEAT TRADES! In other words, keep trading one side of the market until it stops working. It beats flip flopping.
11) Look to DIVERSIFY by considering trading other currencies if the one(s) you primarily trade is not moving or trending.
12) Keep an eye on the AVERAGE DAILY RANGE (see table above) and use it as a guide on non-news days. The average range can suggest a potential range for the day (give or take a few pips).
To sum up, low volatility markets can be frustrating and it easy to get chopped up in tight ranges if you bet on breakouts but the history of the forex market is that they do not last forever. However, while volatility stays low, adjust your trading strategies so you can build a cache of profits so you can take some risk when market volatility (hopefully) picks up.
Feel free to contact me with any questions or comments or to suggest other strategies at jay@tradersadvocate.com
Jay Meisler, founder
Global Traders Association
