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Selecting the Appropriate Trades for Current Market Conditions

Selecting the Appropriate Trades for Current Market Conditions

John Kicklighter, Chief Strategist

Talking Points:

  • Markets are extremely quiet with volatility measures shrinking, ranges dropping to extremes and participation thin
  • In these types of conditions, short-term trades with reasonable stop/targets and restrained size are best suited
  • We look at means for filtering for the appropriate trades and means for setting out the proper strategy

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

The financial markets are extremely quiet. For many, this means sitting on the sidelines for the seemingly interminable future or otherwise forcing trades that don't fit current conditions hoping the eventually revival will be favorable. The more pragmatic approach would be to adjust our filter and trade approach to fit current market conditions. If conditions are quiet, then shorter-term opportunities with clear technicals, proximate objectives and lower exposure to scheduled event risk are preferable.

Once we have evaluated that general conditions are very quiet, we can get to work on the particulars of a capable filter. A cross check against high profile event risk on the calendar, evaluation of activity levels via measures like the ATR and visual confirmation of technicals can lead us to the best options. From there, applying the proper strategy is paramount. Evaluating the time and reach that a setup may require - through an Average True Range (ATR) or Rate of Change (ROC) perhaps - we can establish what pairs to pursue and where to place the stops and targets. Exposure is another consideration - particular with current conditions. The transition from extreme quiet and the short-term trading that is suited for it can lead to outsized risks. Therefore, lowering exposure is appropriate.

While markets can oscillate between active and inactive, from range, breakout to trend; we are currently trudging through some of the most difficult trading conditions - exceptionally quiet. It is easy for anxiousness to arise in these circumstances and to let frustration and emotion dictate trading. However, that can lead to considerable pain in chop. We discuss the evaluation of market conditions, discuss how to approach current conditions and look at a range of pairs (EUR/USD, USD/JPY, USD/CAD, AUD/USD, AUD/CAD and more) in this weekend Strategy Video.

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