How to cope with and trade FX markets when they whipsaw

Feb 8 • Forex Trading Articles, Market Commentaries • 1297 Views • Comments Off on How to cope with and trade FX markets when they whipsaw

Whipsawing FX markets, represent some of the most challenging trading conditions traders can face. Inexperienced traders, who are unfamiliar in witnessing such rapid change, can experience elevated levels of stress and perhaps incur unnecessary and avoidable losses, during periods when the markets become volatile and highly unpredictable.

Coping with such FX market behaviour involves identifying such periods, whilst ensuring you’ve put in place the right coping mechanisms to survive such moves. The coping mechanism involves both your psychological approach and the use of the physical options available on your MetaTrader platform, such as stops and or a circuit breaker. You can also use the various technical indicators to warn or pre warn you of whipsawing conditions, indicators that illustrate a rapid change in the range of a market, such as; the average daily range, or average true range.

Perhaps the best indication of whipsaws is your eyesight, as you can clearly, visually identify an FX pair oscillating in an extremely wide range, with the market behaviour appearing to be random. But it’s important to note that the FX pair will not be moving in a highly random manner, the market for any currency and its associated pairs, is reacting perfectly to the underlying sentiment, derived by the transaction levels, relating to the various currencies in question.

For example; sterling on Thursday February 7th reacted negatively to the press conference narrative delivered by the governor of the BoE, after the central bank announced the base rate would be held at 0.75%. GBP/USD flirted with the third level of support, S3, as he held court. The currency then reacted positively to news leaking from Brussels, that the U.K. prime minister held cordial meetings with her E.U. counterparts, which could ultimately result in avoiding a hard, no deal Brexit. GBP/USD rose to approach R2.

As we can clearly see, the movement of cable throughout the day wasn’t random, the whipsawing nature of the security simply represented the political and economic news relating to Britain. If you were unaware of the background reasons underpinning these rapid movements, then you might stare at a chart and be at a loss. Which is why you must always be aware of the upcoming calendar events, particularly high impact events and protect your positions, or make decisions to enter or exit the market accordingly.

So what protection could you apply to your trading, through the tools you have available, to ensure any potential whipsawing impact doesn’t negatively effect your trading? Firstly; you need to ensure you’re trading through a broker who provides the STP-ECN trading model. Straight through processing, into an electronic communication network, will ensure you’re trading in the right environment. Potentially reducing the potential impact of: poor fills, slippage and spikes, that don’t reflect the true prices being generated by the market place. Your price through STP-ECN is not indicative, it’s precise and relates perfectly with the prevailing conditions in the ECN.

Secondly; you need to reference your economic calendar several times a day and make sure you’re aware of all the upcoming events and data releases. You must also ensure you keep informed, through the financial press and your broker’s various blogs and articles, as to how upcoming events could impact on your trading. You could use your MT4 platform to generate alerts for you, warning you of upcoming events. Or you could use your smartphone in the same manner.

Thirdly; you can use the previously mentioned range indicators and recent price history, to arrive at an informed conclusion, in relation to where you think price might move during the events. Let’s walk through the recent scenario relating to cable (GBP/USD) as it whipsawed in a wide range, to illustrate the points we’re making.

You’re aware the the BoE will be making a base rate decision announcement, you also know that there’s a high probability that the rate will be kept at 0.75%, according to the forecasts by Reuters and Bloomberg and various economists, who are putting a hold at virtually 100%. You also know that if there’s to be any fireworks with sterling, it’ll come when the BoE Governor Mark Carney conducts his press conference, delivering a narrative covering: inflation, monetary policy and GDP growth. Therefore, before the rate setting announcement and the press conference, you look at the charts, you move up and down the time frames, to establish whether or not you’ll widen yours stops, to accommodate increased volatility and the potential for whipsawing conditions to develop.

Experience has taught you that the possibility of price experiencing spikes in either or both directions, during high impact releases and events, is extremely high. You also know that the political issues revolving around the Brussels’ meetings, could also impact on the value of sterling. Therefore, you also take that into consideration as you’re considering whether to place orders into the market, or how to manage any positions you currently have in the market.

This simple exercise outlines a process by which you can: address the issues of whipsawing, potentially profit from such conditions and manage any live positions you may have. You also have the option of remaining out of the market, as you recall the quote from various trading sages; “being out of the market is in fact taking a position”. The market will always be there the next trading session and by avoiding trading during times of uncertainty or self doubt, you can ensure you’re account is protected and that you’re still there, ready to trade in the upcoming sessions.


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