The FX Market is Like a Dormant Volcano – Keep Some Powder Dry For the Big Moves Ahead!
Eric Furstenberg • 6 min read
If the slow forex market has been frustrating you somewhat, don’t let it get you down. It’s normal for markets to spend time in non-volatile phases which often manifest in sideways price action.
If we think of the EUR/USD which has been moving sideways on the weekly timeframe for more than two years, and the AUD/USD which has done the same for almost two years, we need to acknowledge that the market is not what we would like it to be. The massive, persistent, one-sided moves that last for months and even years are just not crossing our paths at the moment.
Look at these charts of the EUR/USD and the AUD/USD:
EUR/USD Weekly Chart
AUD/USD Weekly Chart
Between these two instruments, the EUR/USD probably has the most potential for a long-term trade because it looks like an important long-term bottom may have been formed over the last two years.
Of course, it first needs to break much higher before this can be confirmed.
To read more about the possibility of a major bottom in the EUR/USD, follow this link: EUR/USD Long-Term Outlook – Do We Have a Major Bottom in Play?
At the moment, however, these two currency pairs do not possess the immaculate, powerful trending qualities that long-term traders are looking for.
Surely, there have been some reasonable trading opportunities on these pairs lately, but these were not nearly as impressive as the ones found in the incredible EUR/USD downtrend (before the long consolidation started). Look at this chart:
EUR/USD Weekly Chart
The move represented by the red box covered about 3500 pips in 44 weeks. Now that’s the type of move I’m interested in! Not the boring sideways consolidation that followed it.
Luckily, there are ways to profit in these market conditions and of course, there have been some less prominent (yet useful) trending opportunities in the FX market here and there.
One really important thing to remember when we encounter rather quiet market conditions is that the prudent trader will utilize this time to prepare himself (or herself) for the really big moves that will come eventually.
By studying charts, backtesting certain trade ideas in combination with certain indicators over specific market structures, etc., can sharpen your trading skills considerably.
Traders should also learn how to interpret price action signals. This will sharpen their trading senses and help them not to miss the big moves when they happen.
This is definitely not all you can do in these circumstances, though. Besides the preparation we need to do, we can be active in less active markets and execute profitable trades if we adapt our trading strategies to these conditions.
We can also look a bit further than the forex market and incorporate instruments from other asset classes into our trading arsenal. Flexibility and adaptability can be very advantageous in your trading approach.
For example, the S&P 500 stock index has lately been in a mighty uptrend and has gained more than 19% from the intraday low that was set by the strong selloff caused by the U.S. presidential election in November last year. Here is a daily chart of the S&P 500:
S&P 500 Daily Chart
The Dax (GER30) has also been trending strongly and advanced even more than the S&P 500, with an impressive gain of 26.6% over the same period.
Other instruments like ether and bitcoin have been gaining exponentially. These are generally considered to be riskier assets than forex pairs and equity indices. Nevertheless, they have recently offered much better trading opportunities than any other instruments I can think of right now.
Here are the daily charts of ether and bitcoin:
Ether Daily Chart
Bitcoin Daily Chart
In the same period in which the Dax gained 26.6%, bitcoin gained 338.34% and ether gained an incredible 2195.8%. Can you believe this? That’s over a period of about 7 months.
So you see, many times there are incredible opportunities to make exceptional gains beyond the scope of the forex market.
Of course, there are almost unlimited opportunities in the global stock markets as well. You just need to search for them.
Having said all of that, let’s briefly look at ways to trade the markets when trends are either less aggressive or when price action is moving sideways.
Range trading is one option when it comes to subdued market volatility. An effective way to capture pips in sideways markets is to sell at resistance and buy at support.
However, it helps a lot to wait for certain price action signals to form at the range top or bottom before entering the market.
Here is a link to an article dedicated to the technique of range trading: Pulling Pips out of Range-Bound Markets.
In this article, I go into much detail about how to enter high probability range-trading setups.
Trading Less Aggressive Trends
In instances where market movement is limited, you can still trade in the direction of the prevailing trend but you need to realize that your targets might have to be more conservative.
You don’t necessarily need a magnificent reward-to-risk ratio to make money trading financial instruments. If you apply a reward-to-risk ratio of 1:1 you can still achieve great returns as long as you maintain a good win ratio, for example.
Besides reducing your profit targets to a certain degree, it’s really important to enter on retracements in less active markets. You see, in these trading conditions, the market many times doesn’t have enough force to travel long distances to your take profits without endangering your stop losses, especially if your stop losses are moved to break-even at some point during the trade.
Therefore, by trading retracements, rather than breakouts, you have a better chance of hitting your target. You’ll understand exactly what I mean after we’ve looked at one or two charts:
USD/CAD Daily Chart
Here is an example of an uptrend on the USD/CAD. Do you notice the treacherous pace of this advance? Much time was spent in corrections and sideways movements – not the easiest market condition to make money in.
Nevertheless, there was money to be made by entering on retracements to the mean value (indicated by the area between the 20-EMA and the 50-EMA).
The idea is to enter somewhere between these two moving averages and target the most recent ‘higher swing high’. It’s important to take entries only after a fresh high has been formed because this indicates that the uptrend is still in play.
Of course, you need to see higher swing lows as well, which, in conjunction with the formation of higher swing highs indicate that we have a valid uptrend.
Conversely, you need to see lower lows and lower highs in the event of a downtrend.
Depending on each individual situation, you can adjust the size of your stop losses. As long as your stops aren’t wider than your targets.
Let’s look at the same chart and see how we could have traded touches to the 50-EMA:
USD/CAD Daily Chart
In this example, entries were taken on the 50-EMA and the preceding swing highs were used as profit targets.
The idea behind this strategy is to use the high probability of hitting the ‘zero point’ of the retracement, to your advantage. The zero point is where the retracement started:
'Zero Points' of Retracements in an Uptrend
The price tends to return to the zero points of where the retracements start. One of the advantages of this strategy is that you can hit your target even if the trend forms a double top (or double bottom) and reverses.
The zero point of a retracement is a really conservative profit target and can work really well if a trend doesn’t have much force behind it.
Of course, this isn’t the only effective way to trade sluggish markets but I’ll go over some other ideas at a later stage.
When the instruments you usually trade don’t move in the way you want them to move, you can do the following:
– Keep learning about how the markets work and prepare yourself for the next major trends.
– Don’t be afraid to explore other asset classes. There are often great trading opportunities in the commodity and stock markets. And lately, some cryptocurrencies have been trending aggressively.
– Adapt to the current market conditions, even if you may have to reduce your profit targets and use different strategies.
– Follow our free forex signals that made 4,907 pips in 2016 alone! We scan different asset classes to filter out the best opportunities for you. We trade forex, commodities, and stock indices with great success.
Good luck with your trading!