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How to Trade Choppy Sideways Markets
Written by: PaxForex analytics dept - Friday, 04 August 2017 0 comments
A simple truth of trading is that markets are often moving sideways, neither trending up or down. The term is derived from the phrase choppy seas, where a boat will move a lot but not over any large distance as waves prevent it from moving any meaningful distance. In forex, choppy markets are those which have no clear direction such as a sideways market (not a nice clean ranging market), but a really churned up mess which make traders lose sleep at night. This is where previous gains can be quickly wiped out and it’s a deeply frustrating and demoralizing experience.
Not all sideways market conditions are the same however; some are worth trading and some simply are not. Sideways markets can be worth trading if they are range-bound, meaning they are trading / oscillating between well-defined horizontal levels of support and resistance that have good distance between them. To determine if a market is worth trading, first zoom out and get the bigger picture on the daily chart. Is the market trending clearly either up or down? If not, than it is sideways. If it is sideways, then you need to determine if it is in a trading range or just chopping sideways.
Some of the biggest obstacles in trading have to do with over trading and attempting to trade a choppy market. There are some traders who want to place five trades a day in the currency markets and expect to nail 100+ pip moves on each and every trade. Most of those traders expectations are just out of sync with the order
flow, liquidity and volatility of the market. Yes, the market does trend nicely at times and you should take advantage of the trends whenever you can. But eventually the market gets into choppy or rangy market conditions. And you need to evolve or you will suffer big trading losses.
Trading choppy forex markets takes experience and know how. Using techniques such as stop hunting, options, one day sentiment/macro shifts, and watching for false breakouts. If you are married to trend trading then its simple...find another market that is trending. Finding another markets in forex may be as easy as just changing your pair to a commodity pair. If you strictly trade currencies, then you may be preventing a vast array of opportunities in other markets. There are often times when all the currency pairs are choppy.
Before you place a trade in a choppy market, it is important that you have considered my factors: starting with the bigger picture levels, reviewing potential catalysts, and then refining this further by examining current price action and how it relates to the bigger picture information you just analyzed. Being able to anticipate what kind of day you are facing in terms of price range is just as important as deciding whether you should be bullish or bearish. It is just as important to be able to identify a lack of direction or a flat market, because this information can be very helpful in terms of forming targets and expectations for managing your trades.