Is It Me or Is It The FX Market?

Sam Evans

Firstly, I’d like to continue to thank my regular readers for their e-mails and comments, which are being sent to me on a weekly basis. It is good to know that you’re enjoying the writings and learning some valuable lessons to help you in your currency trading as well. With that in mind I have noticed a common theme over the last few months amongst the questions that are being sent in to me. Most questions and comments are being directed towards the current level of volatility that we are experiencing in the FX markets right now. Many traders from what I hear are finding things rather challenging with the lack of movement and lesser opportunity available on a daily basis. I thought it would be a good idea to address this situation directly in this week’s article.

I will be the first to admit that I am personally finding less trade setups that meet to my ideal requirements right now and my colleagues and friends within the world of currency trading who I speak to on a regular basis seem to be experiencing the same thing as me, so breath a sigh of relief and remember it’s not just you. As we all know, the markets are predictable at times and not so predictable at other times. They will always do what they want to do, therefore we have to be armed and ready to deal with the market conditions that we are presented with and ensure that we don’t force opportunities because there are none there that we would ideally be looking for.

This is probably one of the most challenging things a trader can face, due to the fact that as a profession, trading is often seen as a very active process, rather than a systematic set of rules whereby we analyze objectively, look for only the lowest risk and highest reward trades and then patiently wait for the prices to come to us. In reality, trading actively is somewhat of a conundrum because it really involves more waiting than anything else. We find the waiting process especially challenging when markets fall to levels of low volatility (as seen right now) and range for most of the time. In the FX markets over the last few months we have seen record low levels of volatility in the major and many of the popular cross pairs as well. Take a look at the chart below to see for yourself:

ATR ForexATR stands for average true range, and is a measurement of volatility. To put it simply, it gives us an idea of how much movement we can expect from a market on a pre-set basis. In the chart above we are looking at ATR on a weekly chart with the reading of 0.0123. This tells us to expect a movement of around 123 pips per week on the EURUSD. When you compare this reading to a year ago you can see that we were trading back then at over 350 pips per week. Current ATR is nearly only a third of that. As you can see, this is historically low. Is it really any wonder why traders are finding things a little harder right now when you consider how much volatility has been sucked out of the market? There are many theories knocking around the Internet as to why things have become so quiet in the Forex markets. Many say it’s due to the summer holidays and seasonal low-volume. However, in my humble experience I have traded my way through many busy summer periods, sometimes finding this one of the busiest times of the year. When it comes the markets like currency and stock, I tend to ignore seasonal analysis and avoid trying to predict the reasons why things are happening on a fundamental basis. Instead, I choose to trust price and price alone. Price itself always tells me what I really need to know and if I’m experiencing a tight range-bound market that tells me that the biggest institutions are undecided as to which way the markets should be going next.

It is easy to see how people are getting chopped around trying to trade markets that are moving a lot less than normal. One of the more popular major pairs is USDJPY. I remember the days when this pairing was one of the more volatile and I’m sure there will be a time in the future where it turns out to be just like that again. However. We have to be prepared to except that conditions can change and learn to deal with what is in front of us rather than what we want in an ideal world. Much like the above example shown in the EURUSD, the USDJPY is also trading at historic low levels of volatility, as we can see below:

historic low levelIt’s hard to believe that just over a year ago, this pair was trading over 300 pips a week and now is as low as just over 80 pips. While it is unlikely that things will stay this way forever, we must accept that we have to change our tactics slightly to deal with the markets as quiet as this. I have been advising my students to start to look at the bigger picture levels more actively, as one can easily get confused and whipsawed around if they go to timeframes which are too small. If you apply objectivity and logic to the current market conditions, it would make little sense to be focusing on five-minute charts, as you are likely to get way too many signals thrown at you and the footsteps of the biggest institutions and traders are not going to show up as clearly as they would normally.

An easy fix to this situation is to look for opportunities on the larger levels and time-frame charts, as we can see in the below example:

FX supply and demand levelsNow while we don’t have the time in this particular article to go into the specifics of the supply and demand levels themselves, we can easily see how much clearer the picture is of the USDJPY when looking at it through the scope of a four hour chart. Of course, the ranges are still tight and the pips available are far less, however the opportunities are there if you know what to look for. We can see plenty of buy and sell imbalances that have created Quality levels of supply and demand, giving the disciplined trader opportunity if they choose to wait for it. We just have to accept that the rewards will be smaller and the trades will be fewer but this also has the added benefit of smaller risk per trade. My objective in this article was not so much about teaching new techniques but rather to reassure you that we always have to deal with the conditions that are given to us. Things will liven up in the market in time and there will be more opportunity, but a disciplined trader realizes that they can only operate with the tools that they have been given. Be patient, I can rise to the big picture and remain disciplined and I’m sure you’ll find the doldrums will be over before you know it.

Take care and be well,

Sam Evans

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.