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Tips for staying ahead in a quiet market
Summer
trading can present a number of challenges for trading. For starters, ranges
can be smaller due to the reduced volatility with many institutional traders
away from their desks. Markets are more vulnerable to having patches of
illiquidity with random moves taking out stops more readily on any lack of
order flow. All of the above can result in some frustrating trading
experiences, so here are some tips to help you keep a cool head during the hot
summer months.
Be aware of ranges
If
there is a strong range in play, then it is more likely to hold during summer
trading. So, pay attention to tests of key levels and take a quick look at the
news. Are there any key releases that are coming out?
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If
there is not, then the chances of a well-established range holding are strong.
It could be a great location to trade a quick bounce off a key level.
Similarly, if a key level looks like breaking during the summer months, and
there is little in the way of significant market news, then that break may well
be a false break. So, be aware of these two phenomena; strong ranges holding
and false breakouts of key levels.
Be aware of changing
market dynamics
Automation
has been impacting nearly every area of our lives and foreign exchange trading
is no exception. Once institutions looked to ‘the man’ now more
and more they look to ‘the machine’.
Algorithmic
trading has increased considerably over the last few years and this is
resulting in a key change. The algorithmic trading model involves the ‘algos’
being switched on during the whole year; computers do not need a holiday. Their
short-term, constant day to day profit profiles means that they are going to be
left running during the summer months,
So,
even though the large investors may have key staff on holiday, the age of
automation means that the trading of assets in FX goes on.
Technical levels are still in play
Just
because it is summer it does not mean that technical levels are forgotten. The
key moving averages are still respected. Key moving averages like the 50 MA,
the 100 MA and the 200 MA will still be respected during the summer.
Similarly,
fib retracement levels and horizontal support and resistance levels can still
be relied upon. Take a look at the daily EUR/USD chart below to see how the
moving 50 daily moving averages is respected during the summer months. These
levels can be used to limit and define risk.
Be aware of surprise events
Just
because it is the summer it doesn’t mean that there can’t be some very large
moves in the currency markets. One recent example is that of the Turkish Lira.
It lost an astonishing 20% of its value in just one day of summer
trading.
If
you look at the chart below you can see the nearly parabolic weakening of the
Turkish Lira against the US dollar. Moves like these are rare, but they
are possible at any time. So, keep alert for any major market moving
news. If you had been switched onto the story behind the moves seen here, you
could have netted yourself a tidy profit.
Be willing to reduce intraday
targets
You
may want to consider taking slightly smaller profits during the summer months
and particularly consider taking profits when price pushes into key support and
resistance levels which are less likely to break. If you normally look for 60%
of the average true range for your profit target, consider taking 50% of the
average true range instead.
Be prepared to set wider intraday stops
At
first this can seem counter intuitive, if ranges are narrower
shouldn’t you use smaller stops too? Not
necessarily. To understand this point look at the market when it opens each
week on a Sunday evening.
What do you notice? You will see a market that seems slow, yet
it can have very quick and strong short term directional moves. Why is this and
what is going in here? This is how an illiquid market moves. Now, if there is a
lack of liquidity during normal market hours the same type of price action can
occur. This can needlessly take out your stops, so consider reducing your
position size and setting wider stops.
Be sensible and take
a break
You will also want to factor in a break during the summer and
make sure you don’t trade when you are on holiday. It will firstly ruin your
holiday and secondly it will present you with logistical problems if you lose
internet connection or can’t check your trade during a flight or a trip. So,
ensure that you give yourself a summer break too. The markets will still be
there when you return.
This post was submitted
by brokerage, LegacyFX