Market Movements – Forex Academy

The market you are in is experiencing capital outflows, that is what is going on. Pull up your plan B. You noticed how the market has changed. It may not be trending as unusual and the opportunities have been scarce for a while. What do you do now?

First, we need to acknowledge that the market never remains exactly the same. Sometimes the market will trend for a while after which we may see equally long (or longer) periods of consolidation. In fact, the market can be so devoid of any action that you may wonder if you are ever going to get a trade opportunity that is not a fake breakout.

From time to time, we will not be able to see any definitive upward or downward movement and the prices may not get to make your take profit targets, making traders insecure about the overall market direction.

So, how do you know that you are in a dead market?

Even though we can determine market volume with the help of ATR, ADX, and Bollinger Bands, among other tools, the $EVZ volatility index has proved to be extremely useful and easy to use. When you open the full chart, you will be able to see a number under the heading “Euro FX VIX.”

If this number is lower than seven (7), for example, this means that volume and volatility are low. Also, the lower the $EVZ index is, the lower the chance of winning a trend following trade is as well.

If we need volume to trade effectively, how should we then approach long market dry spells?

There are a few ways to deal with unfavorable markets. First of all, dead markets are not the markets we want to trade, especially as beginners. However, we can still be productive! As a beginner trader, you are probably developing your system and trying to see if your tools are giving you valid information on the market.

If you are backtesting or forward testing your system, you should be getting a clear sign not to engage in trading at the moment. If you are still getting signals that it is ok to proceed, you need to change the volume/volatility indicator you are using.

Still, low volume/volatility is a normal part of market oscillations, as these constantly fluctuate. Even if you are getting a lot of losing trades, do not get discouraged. Your time will come.

You may be wondering if you can still trade despite sideways market movements, and the answer is…

…YES and NO.

You should not trade at this time because the price direction guesswork is extremely hard to get right and you can easily lose a lot of money. If you aren’t getting any signals, there is no reason for you to push it. Just stay put.

If you are, however, getting signals to enter a few trades please choose wisely! For example, forex traders may not want to trade pairs whose currencies are heavily monitored by big banking institutions. Any strange news event will also be a reason strong enough to avoid certain currency pairs altogether at this time.

Also, be careful with your money management!

We cannot scale out when the market is unresponsive. Therefore, we should in such cases take the entire trade-off at the first take-profit point. While we may be getting wins that are smaller than usual, we know that these are safer wins after all. It is far better to have minor wins than major losses. Even if the trade you exited seems to be heading somewhere, do not be regretful. Cut your take profit targets.

If the market happens to be extremely low in volume and volatility, you should also manage your risk differently!

We usually cannot have a standard 2% risk on trades encumbered by sideways market movement. Reduce your risk to 1%, for example, if you see that the $EVZ index is reaching incredible lows, like in 2019.

What you can also do in times like these is use a smaller time frame to pick up your wins more easily. Again, dead markets do not necessitate that you forsake your daily time frame by default, but it can be a good opportunity for you to see if there are any changes between different time frames.

This is a reminder not to forget the power of your mind!

If you are not prepared mentally or emotionally, your account will suffer no matter the conditions. If you start panicking the first moment you spot any sideways market movement, the likelihood of you making a good decision will start to decrease exponentially.

There is also a major prejudice concerning market volume and volatility. What we need is balance – in the market and in our approach to it. Therefore, if we enter trades with high volatility or volume, we are also adding unnecessary risk, which can be detrimental to our accounts.

Looking for an ideal trading scenario to start trading is as futile as is failing to recognize the potential of dead markets. When we are faced with the saturation of sideways market movements, we should perceive the market as our fertile land. It is those moments that give us perfect room for improving our systems. Reflect on your past trades and decisions, and see what you can do better. Focus your attention on your trading and test, test, test. If you find a strategy that is working well in these conditions, this is your plan B, switch to it.

Unfavorable market conditions affect us all. Do not think that experts are making a ton of money under any circumstances. You may have even had plans to leave your current job and turn to trading only, but now is not the time. Make no rash decisions, keep all of your sources of income active, and just wait for everything to go back to normal. Even when it does, you may still need a few months or years for everything to work out as you planned.

What happens when the market finally comes back to us?

Well, no matter how well-developed your system is, most volume indicators cannot record the first big move as quickly as it occurs. So, now that you know that it isn’t your fault, do not give in to any doubts or regrets and just move on.

Finally, there is no way for you to “trick the system” and evade the sideway market movements. It is a perfect time to develop a strategy that can work in dead markets, it will stay with you when the markets are dead again. Do not go looking for a volume indicator that would tell you what you want to hear. Instead of feeling sorrowful about your fate, look where you have the power to initiate change. Trading is not about making wins only. Protecting your account and making smart money is far more important.

In times of recession, the US currency acts in the same way. The global economy is cyclical. And whether in periods of GDP expansion or recovery, the US dollar allows other competing currencies to take the lead, but in times of recessions, the dollar grabs the blanket.

The main reason is that the US economy is too important and the dollar plays a major role in international payments, gold and foreign exchange reserves, Forex trading volumes, and cross-border loans. A global recession makes investors forget the influence of European macro statistics on the euro rate or the influence of the Bank of Japan’s monetary policy on the yen rate, the pressure of political risks on the exchange rate of the pound sterling. All eyes are on a single coin. The US dollar.

Interestingly, the dollar behaves very similarly in the course of recessions, and this may have become the beginning of the dollar smile theory, which was developed by Stephen Jen, a famous currency strategist for Morgan Stanley. There are three obvious steps in the dynamics of the USD index:

– The Dollar Is Actively Bought Since the US Economy Is Very Stable.

– USD is sold in the midst of the Fed’s aggressive monetary expansion.

– The dollar is bought back amid expectations that the US GDP will recover faster than other countries’ GDP.

As a result, a smile-like image appears.

Let’s look at the dynamics of the USD index in more detail. In the first stage, the dollar is in high demand as the United States economy is strong. It looks better than others, increasing demand for US stocks and bonds and leading to increased investment flows. In 2019 and early 2020, the USD index actually grew in the midst of trade wars, which are the reason for an impressive rebound of the S&P 500 and high demand for treasury bonds.

The first stage always ends with a correction of US stock indices that ultimately makes the bearings the dominant force in the stock market. The dollar manages to reach its peak, “the left side of the smile”, as investors prefer “flight to quality”. It acts as the main safe-haven currency. At the end of February, due to the coronavirus, the S&P 500 moves to bear territory in the shortest possible time, 16 days. The correlation between the stock index and the USD index becomes an inverse relationship. In the first phase of the previous global economic crisis, the dollar consolidated at 24 percent from March to November 2008.

In the second stage, which Stephen Jen decided to call the “smile fund,” there is a sale of the dollar due to the Fed’s aggressive monetary expansion. Cutting the federal funding rate to near zero, unlimited asset purchases, and the White House’s large-scale fiscal stimulus reverse the bearish trend of the S&P 500 at the end of March. Increased demand for risky assets contributes to the closure of long positions on the green note. A similar situation occurred in the last months of 2008, when the Fed through aggressive monetary expansion, including the launch of QE of $700 billion, tried to reverse the bearish trend in the US stock market and bring USD fans to a fixed point. For a while, there was even a sense that it did: the USD index fell in December.

In the third stage, the dollar rises again, as investors begin to believe that the US economy will recover faster than its foreign counterparts. US stocks seem cheap, while low borrowing costs, the Fed’s ultra-soft monetary policy, that gradually recovers GDP and hopes that corporate earnings growth will rekindle the interest of non-residents in US assets.

So, if we follow the dollar smile theory, it’s time to buy the dollar. At the same time, it is not the fact that the US economy can recover faster than China’s global GDP, and the Fed’s strong desire to prevent the strengthening of the dollar from seriously changing the rules of the game.