Hello traders! This week’s newsletter is about the inconsistencies we find in the markets, and how with a little bit of patience we can make things easier on us…
Have you ever had one of those weeks or months in trading where the pips just wouldn’t stop coming into your account? You are on the internet looking at expensive homes, cars, trips, better colleges for your kids, etc., and then things seem to change. All of a sudden, what seemed like an easy proposition (trading) has turned into a nightmare? Well, welcome to trading everyone!
We can normally define a market as either trending up or down, or moving sideways. Depending on how/where you learned to trade, your initial experience was in one of those markets. Once you started earning a few pips (if you were keeping a trade journal!), you should have gotten an idea of what kind of trader you are. Some traders are great in sideways markets, looking to buy near the bottom of a range and selling near the top of the range. Some are much better in up or down trending markets, selling small rallies in downtrends and buying the small pullbacks in uptrends. The complete trader would have the ability to trade all three ways. But what if you aren’t a complete trader yet?
In the following EURUSD 480-minute chart, I drew in a yellow rectangle designating a sideways channel of about 160 pips. Every few days you could be trading this range bound market, buying near the bottom and selling near the top; then reversing to go short, selling near the top and buying back near the bottom. This would have been a pleasing, consistent strategy for a few weeks. However, at the green 1 on the chart, the price has decisively broken out of the channel. Now, some learn to trade and become proficient at sideways range trading and they might continue attempting to sell SHORT rallies and buy to cover on the pullbacks. In my opinion, this is a very difficult and time-consuming way to make a few pips (countertrend trading).
A more complete trader would have recognized that at number 1 the market has changed. He or she would shift gears from the range bound technique to trading primarily on the long side; buying the pullbacks to demand, selling in supply, then waiting for the next pullback. Notice the uptrending channel lines drawn in. The complete trader would have been able to draw in the lower line when the green candle at 1 broke out of the range. The upper channel line would not have been able to be drawn in until about 10 candles later when the first real pullback in this new uptrend happened.
The inexperienced, incomplete trader who learned in a sideways market was probably frustrated with their results until the next sideways market happened, marked with the yellow box in the upper right on this chart. The inexperienced, incomplete trader who learned to trade in an up or down trending market would be frustrated during the times of sideways markets. Why would they be frustrated? Because they would get stopped out repeatedly using just one technique!
So how do we fix this trading problem? Well, three ways come to mind. The first is to only trade the trend that you are good at; your trading plan and journal should show you exactly what trend you make the most pips off of. If you are good at a sideways market, and the pair you are looking at ISN’T in a sideways market, find one that is! There are several currency pairs you could try, from JPY crosses to commodity pairs. Somebody will be in your favored trend direction!
The second way to fix the problem is to be flexible and learn to trade the other trends. This is much more of the complete trader mentioned earlier.
The third way is to learn options on your forex pairs. There are so many different ways to trade options, in both sideways and up/down trending markets, there is nearly always a trade available.
So, let’s wrap this up. Looking at your trade journal, you should know what type of market you are best at trading. To become a better trader, work at improving your weaknesses, and maybe start trading another asset class (options) to help with making you a better all-around trader!