The Forex market moves in cycles, which means low volatility will happen at one point or another.
The good news is you can still trade in a slow market and win. It’s all about implementing strategies suitable to market conditions.
What is low volatility trading?
In Forex, volatility refers to the risk involved when currency rates change. When it is high, the potential to profit from big movements are also high. This also means taking bigger risks.
The opposite happens when market volatility is low. Due to the minimal rewards in such a market, it’s less attractive to big market players.
But is this reason enough to not trade at all?
No. There are still opportunities to profit when the market is slow.
How do you identify a low volatile market?
Check if a range is forming
When the market is trending, you’re going to see a series of uptrends or downtrends. The absence of these means a range is forming. Look for two bounces from the top and bottom range to confirm a range.
Use Bollinger Bands indicator
As a chart indicator used to determine market volatility, the Bollinger Bands is one effective way to identify low or high volatility.
- It’s low when the bands contract, narrow, or move closer.
- It’s high when the bands expand or spread apart.
Use the Average Directional Index (ADX) indicator
ADX is another indicator that’s used to measure market volatility and the overall strength of a trend. When ADX hits above 25, the trend is strong. When it’s below 20, then market volatility is low.
How do you trade in a low volatile Forex market?
It’s important to be cautious when entering a slow market. You may need to use a different set of trading strategies as well.
1. Focus on smaller wins
Consider the slow market movements and trade with lower profit targets in mind. This way, your expectations will meet the outcomes of your trade. Under such market conditions, switch to low multiple trends and then change gears when the market recovers.
2. Use a lower timeframe
When volatility is low, currency pairs crawl rather than hit big daily chart targets. This makes it tougher to find entry points using larger time frames. But if you switch to a one-hour time frame, for example, you’ll find ranges with lots of potential for short trades.
3. Lower the size of your trade
Avoid trading your entire position under such conditions. You should trade half of the position size you normally use to mitigate risks. This is also one way to catch profits quickly as they arise.
4. Use a breakout strategy
During low volatility, there are brief periods when the market breaks resistance or support. This breakout can happen following the release of new economic data. When you see one, wait for the candle to close above resistance or below support and then buy or sell with half the range. Because failed breaks can occur, always trade with a stop-loss in place.
5. Repeat winning trades
It’s important that you don’t lose big when the market is slow. One way to avoid this is to pick a specific side where profitability is high and then keep trading it. Don’t trade all over the market. Once the side you pick stops working for you, only then should you change your strategy.
When the market is slow, it makes sense to take a break and just enjoy the bigger profits you made prior. But if you prefer to continue trading, use the strategies listed above to minimise losses and ensure smaller wins.