In the currency market is often said that there is more volatility and trading volume in other markets (see What is Forex?) And often also that most traders prefer to stay out of the market during periods of low volatility and wait to return the broad and rapid movements.
However, a professional trader must adapt when market conditions change and be consistently profitable. I'll give you some tips I've recently learned if we want to try their hand at trading during periods of low volatility.
1. Strategies trading in range, no trend
The vast majority of the periods in which there is low volatility in the market will be in a situation of market range. In this environment the first thing we have to do is let into the drawer our systems and trading strategies trend followers and explore strategies range and learn to trade on lower time frames.
And if you want to stay with the trading strategy that come using trend periods, you have to add to it some indicator that works well in situations range and low volatility. Some of these indicators could be the Stochastic, Relative Strength Index or the Parabolic SAR. You may also be useful indicators as Average Directional Index or the Average True Range to detect stages of low volatility (see also How to measure price volatility).
2. Explore the crosses and exotic pairs
To trade with low volatility can be very interesting to let the older pairs (EUR / USD, GBP / USD, USD / CHF and USD / JPY) as well as the most popular crosses (like EUR / JPY for example) and give it a opportunity to exotic currencies and other rarer crosses.
These exotic pairs typically have much less liquidity, which translates into greater innate volatility. For instance, if I look at the moment the EUR / NZD I can see a ATR 20 days with a value of 146 versus 64 pips on GBP / USD or 53 EUR / USD. Crossings in exotic also be found to be strong daily trends, usually more sensitive to the fundamentals.
But keep in mind some very important aspects if you operate exotic currencies:
Due to the low liquidity, spread and margins may be very different to what you're normally used to.
The pip value is different to what we see regularly. Note that the pip value is normally calculated in US dollar or the currency in which is called your house holds (see How to calculate the value of a pip).
There is an increased risk of landslides in the price of execution of orders (slippage) derived from the lower liquidity, especially during changes in market sentiment.
If you do not know and are aware of these three points we can bring large and unpleasant surprises in the trading of crosses and exotic pairs. The trading plan and money management is at its best.
3. The distances from the take profit and stop loss
The expectations of profit during periods of low volatility can not be even remotely, the same trend during periods of high volatility. You have to adapt to new conditions and establish smaller profit targets and stop loss tighter (see Where to place the stop loss).
We must accept that expectations are inevitably lower because with low volatility can not wait movements of hundreds of pips. Some think that these children take profit targets can be offset by a higher position and a smaller stop loss. From my perspective this recommendation should be handled with caution and if we decide to do, be prepared psychologically to handle larger operations.
4. Be prepared to the breaking point
When trading is done with low volatility must be prepared for potential breakouts range. Breaks in range areas usually come peaks and movements generated by high impact news. We must be prepared for these events not caught us by surprise, to limit risk and take advantage of the broad movement generated (See The trading breakouts and trading in consolidation phase and the benefit of the explosion).
However, a professional trader must adapt when market conditions change and be consistently profitable. I'll give you some tips I've recently learned if we want to try their hand at trading during periods of low volatility.
1. Strategies trading in range, no trend
The vast majority of the periods in which there is low volatility in the market will be in a situation of market range. In this environment the first thing we have to do is let into the drawer our systems and trading strategies trend followers and explore strategies range and learn to trade on lower time frames.
And if you want to stay with the trading strategy that come using trend periods, you have to add to it some indicator that works well in situations range and low volatility. Some of these indicators could be the Stochastic, Relative Strength Index or the Parabolic SAR. You may also be useful indicators as Average Directional Index or the Average True Range to detect stages of low volatility (see also How to measure price volatility).
2. Explore the crosses and exotic pairs
To trade with low volatility can be very interesting to let the older pairs (EUR / USD, GBP / USD, USD / CHF and USD / JPY) as well as the most popular crosses (like EUR / JPY for example) and give it a opportunity to exotic currencies and other rarer crosses.
These exotic pairs typically have much less liquidity, which translates into greater innate volatility. For instance, if I look at the moment the EUR / NZD I can see a ATR 20 days with a value of 146 versus 64 pips on GBP / USD or 53 EUR / USD. Crossings in exotic also be found to be strong daily trends, usually more sensitive to the fundamentals.
But keep in mind some very important aspects if you operate exotic currencies:
Due to the low liquidity, spread and margins may be very different to what you're normally used to.
The pip value is different to what we see regularly. Note that the pip value is normally calculated in US dollar or the currency in which is called your house holds (see How to calculate the value of a pip).
There is an increased risk of landslides in the price of execution of orders (slippage) derived from the lower liquidity, especially during changes in market sentiment.
If you do not know and are aware of these three points we can bring large and unpleasant surprises in the trading of crosses and exotic pairs. The trading plan and money management is at its best.
3. The distances from the take profit and stop loss
The expectations of profit during periods of low volatility can not be even remotely, the same trend during periods of high volatility. You have to adapt to new conditions and establish smaller profit targets and stop loss tighter (see Where to place the stop loss).
We must accept that expectations are inevitably lower because with low volatility can not wait movements of hundreds of pips. Some think that these children take profit targets can be offset by a higher position and a smaller stop loss. From my perspective this recommendation should be handled with caution and if we decide to do, be prepared psychologically to handle larger operations.
4. Be prepared to the breaking point
When trading is done with low volatility must be prepared for potential breakouts range. Breaks in range areas usually come peaks and movements generated by high impact news. We must be prepared for these events not caught us by surprise, to limit risk and take advantage of the broad movement generated (See The trading breakouts and trading in consolidation phase and the benefit of the explosion).
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