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9 Strategies to Trade in a Low Volatility Market

19 Years ago | April 21, 2014 10/1/22, 12:00 AM

Are you frustrated by tight ranges and getting chopped up when currency rates do not move much? Are you frustrated by the lack of trends? Are you looking for trading strategies you can use in the current environment. Here are 9 things you can do to help you trade in this low volatility market.

 

If you are trading the forex market this year, it is hard to not recognize the lack of volatility that has frustrated not only trend traders but day traders as well.  I read an article recently that indicated the FX Volatility Index, which measures expected movements one month ahead, had plunged to a seven-year low. I look at volatility as a market characterized by tight ranges and limited follow through with false starts in both directions. It is a matter of adapt if you want to survive trading in this environment and i have come up with strategies designed just for this purpose.

 Look at the major currencies (see below), there is not one that has an average range of 100 pips let alone 1% per day. If you factor out the occasional news driven volatile days, the average trading range per day is even tighter.  There is more volatility in crosses but even in those pairs, it is relatively calm by historic standards.

 

Average range per day in pips.(%)

 

 

EURUSD

USDJPY

USDCHF

GBPUSD

USDCAD

AUDUSD

30 days

71 (0.5%)

53 (0.5%)

55 (0.6%)

80 (05%)

69 (0.6%)

73 (0.8%)

90 days

75 (0.5%)

67 (0.7%)

62 (0.7%)

84 (0.5%)

74 (0.7%)

78 ().8%)

200 days

67 (0.5%)

55 (0.5%)

62 (0.7%)

100 (0.6%)

65 (0.6%)

88 (0.9%)

 

So, the question is, how do you trade a low volatility market and survive when prices don't move? Without getting into a long discussion, here are some suggestions for trading in this type of market.

  1. Be realistict Identify the type of market you are in and take what the market will GIVE to you, not what you HOPE it will give to you.
  2. In low volatility markets it is hard to make losses back so be selective and look to trade the strong side of the market, which I define as the side where there is less chance of getting caught in a run through stops. Look to trade when you can identify a stop that gives you staying power (see my article Avoid Dumb Trades and Dumb Stops).
  3. The forex market has an insatiable quest to run stops. Currencies will settle into relatively tight ranges when there are no more stops to run for the day.
  4. Stay alert! Treat the average day as a range market but beware of those days where there is news that can shake the market out of its slumber. Don't trade a range day when news and/or technicals suggest otherwise.
  5. News matters! Look ahead to what news is coming out as that will give you a clue what will be the strong or weak side ahead of a key news event. It is often safer to trade in anticipation of how the market will position itself ahead of a news event rather than trying to trade on the actual outcome. 
  6.  Look to take profits sooner in a low volatility market than when markets are trending.
  7. Beware of tight ranges as small moves within it can exaggerate a swing in your sentiment and lead to ill-advised trades based on emotion.
  8. Try repeat trades. In ither words, keep trading one side of the market until it stops working. It beats flip flopping,.
  9. The most obvious temptation is to write options to collect premium but this is not a strategy I suggest for the average retail trader and certainly not anyone without deep pockets. It may work for a while but when volatility increases it can be a road to disaster. If you take this route, don’t write naked options, especially with volatility so low, without making sure you are covered (e.g. straddle) in case the market suddenly turns volatile.

Low volatility markets can be frustrating and it easy to get chopped up in tight ranges if you bet on breakouts but the history of the forex market is that they do not last forever. However, while volatility stays low, adjust your trading strategies so you can build a cache of profits so you can take some risk when market volatility picks up.

Feel free to contact me with any questions or comments.

Jay Meisler, founder

Global Traders Association

 jay@tradersadvocate.com

 

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