A very short trading week with thin trading conditions could greatly limit market volatility over the next few days. Although sparse market liquidity can magnify unexpected market shocks, its normal effect is a pacifying of the markets. Unless we get such a market shock or very strong year-end flows, we might not see a lot of market movement throughout the rest of the week.
If you like intraday trading, such quiet trading conditions may weigh on your results. I can still remember how frustrating the first December was that I traded forex. Back then the market was very sluggish, especially during the last trading week of the year.
Monday was closed for retail FX trading. Many large financial centers will still be closed on Tuesday. Wednesday and Thursday are normal trading days. On Friday the UK and Germany will close early, which means that we only have two full trading days this week.
So how can we effectively utilize a week that could yield limited market movement? Well, I suppose a trip to some tropical island could be great, or otherwise a ski holiday in the Alps 🙂 But wait, maybe we can utilize this potentially quiet time to enter a couple of long-term trades. You see, a longer term approach is largely unaffected by short-term price fluctuations or range-bound price action. However, a long-term approach may take advantage of the market conditions this week to snatch entries at great prices before 2017 restores full market liquidity.
Bargain Hunting the USD/CHF
I really like the setup on the USD/CHF. Here is a daily chart of the pair:
USD/CHF Daily Chart
The last seven trading days have not been able to move the exchange rate beyond the large blue candle from which the bull flag is drawn. This type if inside price action can be a warning to us that a breakout to the topside may be on the cards soon. Another positive factor for this pair is that this consolidation phase of the last few days, is indeed corrective in nature, and the sellers have not even been able to push the price down to the 20-EMA (20-day exponential moving average). Call it what you want to, but this bull flag pattern looks very appealing and points to a further rise in the exchange rate.
So, how can we exploit a setup like this? Well, there are many different approaches. The first would be to enter the market at the current price (1.02665) with a stop loss of about 200 pips and a take profit of 200-300 pips. This doesn’t offer a massive risk to reward ratio, but it does present a high probability setup which takes advantage of the prevailing trend direction. Of course, you can tweak the stop and target distances to suit your own trading style, and you can even split your position into smaller positions which are managed differently. The idea of the latter is to allow one position to ride the trend for longer just in case we get a very large push higher. The other position(s) would have smaller profit targets in order to at least take partial profits, just in case the trend reverses, and all your gains disappear as well. When the first trade(s) hits its target, the remaining trade(s) can be brought to breakeven. Then the remaining position's stop loss can be manually trailed below relevant swing lows until the trade either hits its profit target or when the trailed stop loss gets taken out.
Another option would be to wait for the pair to break out of the bull flag you saw in the chart above, before entering new positions. You would probably want to use a larger stop loss in this case. This has the advantage of a certain degree of confirmation of the correct direction of market momentum.
This week offers little important news events. Tuesday offers US CB Consumer Confidence Numbers at 15:00 GMT. I don’t expect a massive market reaction to this, but let’s see how it goes.
Personally, I’ll be on the lookout for continued US dollar strength. I like to stay with the trend, which is a trader’s best friend.
I hope you’re enjoying this festive season so far. I certainly am, although I don’t like all the trading holidays. I suppose a short break from the charts won’t do any harm, though.
All the best, and as always, good luck with your trading!