Lessons from the Pros

Forex

Adjusting Pip Targets in Changing Markets

Hello traders! This week’s newsletter is going to discuss the lowly expectations we have come to accept in the current forex market of late.

Last week I was teaching a futures class (yes, I know, a different asset class!) in our beautiful Houston, Texas campus. One of the questions that came up at lunch was, ‘Which is your favorite asset class, forex or futures?’. It was followed up with the question, ‘Which currency pair is your favorite?’. While having a favorite asset class or forex pair is like asking someone what their favorite pizza is, my answers to these common questions are this: ‘It depends’.

So, what does it depend on? Well historically, at least to me, it depends on which charts are the cleanest and also who is trending the most. Or put another way, what is consistently paying more pips or ticks. When looking at the following daily chart on the EURUSD, you can plainly see that the volatility measured by the wiggly blue line, the Average True Range (ATR for short) has been steadily decreasing since the beginning of the year. Currently the ATR shows a range of approximately 53 pips per day, which is the lowest since summer and fall of 2014!

Forex trading chart showing the EURUSD pair

Looking at the rest of the major pairs, the GBPUSD is at 102 pips per day (still higher than most while the whole Brexit thing plays out), USDCHF is at 47, AUDUSD at 63, NZDUSD at 57, USDCAD at 77, and the USDJPY is at 48 pips per day. Historically, these numbers (except the GBPUSD) are near the lower end of their ranges.

Free Trading WorkshopOne of the problems new traders have is adjusting to changing market conditions. If you began trading or took your first class when the daily ATR was higher (like in January of 2018 when it was around 110 pips per day on the EURUSD) your profit targets would have been more pips, say 50-60 pips for swing traders. If you are still looking for the same profit targets now, when the ATR has been cut in half, you may have to DOUBLE the amount of time in your trades to hit your target! So the point is, if you aren’t paying attention to how volatile the market is currently, and use a more volatile time for target expectations, you may be disappointed in your current trading.

There are two easy ways to help correct this issue. The first has already been hinted at: look to be in trades for a longer period of time to achieve the same pips for your trades. If you were trading from a 60 min chart and achieving 30 pips or so on your winners, you may have to go out to a 120 or 240 minute chart to achieve the same targets. The second is to look for pairs that have more volatility. The main thing to be aware of is that the leverage/margin requirement is often double, triple or even more on those pairs compared to what the majors have!

Until next time,

Rick Wright


DISCLAIMER 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.