By Steve Misic, Online Trading Academy XLT-Forex Trading Instructor
By Sam Evans, Extended Learning Track Instructor - Sam is filling in for Steve this week. Enjoy his article!
It's not been an easy few months for Forex traders. Over the last nine weeks, a majority of currency pairs have been stuck in a truly indecisive range, fooling many novice traders into anticipating the next big breakout. I have heard constant remarks about the difficulty of these conditions and indeed such price action can be a little testing. However, over time, a trader learns to be patient and just because the market hasn't decided what it's going to do next, it doesn't mean that there isn't low risk opportunity. You just have to adapt and allow the market to objectively lead your trading decisions. Traditionally, it has been stated that the global FX markets offer some of the greatest Trend Trading opportunities across all financial instruments and many speculators have enjoyed the benefits of such market conditions over the last few years especially. In the early days of my own trading education, the statement "The Trend is Your Friend," was drilled into me over and over again by my teachers and it's a lesson I constantly preach to my own students in the Online Trading Academy classroom and during our Extended Learning Track (XLT) sessions. However, I always like to remind them that markets are not in trend mode all the time, even in the world of Forex, and we always have to be prepared to adapt to current market conditions at all times. All markets are in a constant state of evolution with regard to supply and demand and any consistently profitable trader continually adapts their techniques to suit market conditions. So if you have been relying solely on Trend Trading strategies over the last few months, I hope you have kept those stops pretty tight, as the market has been far from forgiving… Don't get me wrong, I always like to get involved with the latest trend, but I learned quickly that the market doesn't always do what I want it to do, so now I just sit back, analyze the playing field and pick my plays to match the action. Let's take a look at a picture of EURUSD over the last few weeks:
Figure 1
Figure 1 shows a range of price action on this currency pair dating back to June of this year. During this consolidation period, it was clear to the objective speculator that the market was clearly undecided as to which direction was next. Who can really be surprised with the current global economy hanging on a knife-edge? If the market can't make up its mind where we are heading next, then how can the individual trader? None of us can predict the future! But we all have the ability to analyze unemotionally and put together a systematic plan of action that stacks the odds in our favor and keeps risk low. What we do know objectively is that this is a picture of a currency pair clearly trapped between Supply (resistance) and Demand (support). Until either of these areas is broken, I have no reason to assume that the market will not continue to stay stuck in this range. The simple approach is to let the market show us it wants to go higher by eating up the supply at the top of our range to make higher highs, or allow prices to chew up the demand at the lower end of the range and descend to lower lows. Only then will we all have a clearer idea of where prices are going next and there will be plenty of Swing and Intraday opportunities to engage the new trend by buying pullbacks or selling rallies.
But trying to encourage an uneducated trader to sit on his or her hands during these indecisive periods of range-bound activity is never an easy task and I have seen plenty of accounts blown by aggressive new traders attempting to buy high in the anticipation of the breakout to the upside, or selling short ahead of what they think will be a breakdown to lower prices…this rarely works in real world trading and usually ends in further pain and margin calls for the newbie as they get suckered into yet another fake-out. By buying high after a period of buying, or selling low after a run of selling, a trader is simply entering the game far too late, well after the big players have scored their points and headed home with the prize money (delivered to them by you). Unfortunately, this leaves most chasing the market in overtime and not only exhausting their mind but their bank balance as well!
If one is looking to get involved in a market range, then simply adjust the game plan and look for the highest probability areas of the field to make the play. Let's drill down to a 4 hour chart of EURUSD:
Figure 2
By stepping down a timeframe, we can now see that EURUSD has just dipped into a pocket of established demand, well away from the highs of the range. There is a strong possibility that prices will rise from this area as the chart shows us that on June 15th the market rallied well from this price zone, illustrating demand (support). A long position in this area offers the trader a high probability, low risk entry into the market place and if prices do rally to the upper end of the range, then we will have had plenty of chances to take profit and leave a little on the table if the market does produce a breakout higher. Even if the market does retest the highs of the range once more, until it breaks and trades higher, there would be no reason not to consider a short position where we can see supply. Until the market proves me wrong, I will be looking to sell as high as I can or buy as cheaply as possible, getting myself set, safe and profitable for when I see a new trend emerge. Patience is one of the keys to trading successfully which involves planning, discipline, and unemotional analysis to find only the highest probability, low risk trades at the extremes. I would rather be involved in a breakout after being one of the first to buy or sell, knowing that I took profits at my targets and that I can afford to be in the trade still if the breakout fails because it will be a zero cost to me. And if it does break, then it's simply a bonus!
Dealing with markets during consolidation ranges can be tough for any trader and if you aren't a fan of these scenarios, then there's nothing wrong with sitting on the sidelines and waiting for a new trend to develop. I would praise any such trader for their discipline and having a strict set of rules as these are two of the major components of trading success. One technique will not work for all conditions so you have to be adaptable at all times and bring the right skills to the right game. Identify the novice opposition and use your set tactics.
So until next time, safe trading and take care.
Sam Evans - sevans@tradingacademy.com
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