Choppy Forex Market, How To Trade
When the forex market becomes choppy, traders should not trade, or they should use much stricter guidelines for entering and managing their trades. In this article we will review what a choppy forex market is, how to identify a choppy market, and some ways to possibly trade during these market conditions.
Choppy Forex Market Versus Trending Market
The Forexearlywarning trading system is a trend based system. In some cases you can trade in non-trending markets if the market is ranging, employing a range trading strategy. When trends come to an end the market can start to consolidate and go sideways. It can happen quickly, in the space of one to two days. If a large number of pairs are consolidating at the same time, the overall market can become choppy.
What is A Choppy Market
A choppy forex market is when the majority of the pairs we follow are going sideways, bouncing and spiking, and the larger time frames like the H4, D1, W1 indicate few, if any up trends or downtrends. Or when many pairs are consolidating at the same time.
Sometimes the forex market is not choppy, but most of the pairs are ranging in very tight ranges. When the market is ranging on the M30 time frames or less on most pairs, trading can be much more difficult than when it is trending because the range cycles are so small. When the market is ranging on the small time frames, technically, this is not a choppy forex market; however the risks are still increased. If you would like to trade a ranging forex market just make sure the pairs are ranging on larger time frames with ranges of at least 125 pips from top to bottom.
What Causes A Choppy Forex Market
A choppy forex market occurs when both of the currencies in a particular pair are strong, or both weak, at the same time. This creates a "tug of war" of up and down, choppy movements. The other possibility is that neither currency is moving at all, both currencies are consolidating. If both currencies in a pair are strong or weak at the same time it creates a tug of war that causes sideways, choppy movements. If you see a market with a large number of choppy pairs or groups of pairs across several currencies at the same time, this can cause the entire market to stall and go sideways.
Sometimes the market can become choppy and go sideways for 1 to 2 days ahead of important news drivers. For example, if the USD has interest rate news pending in two days, sometimes the market stalls and goes sideways in advance of the news, awaiting the outcome of the news. The USD is the most liquid currency with the highest trading volume and sometimes acts as a bellweather for the forex market. When other currencies have important news pending, the currency pairs including those currencies can also go sideways and become choppy. For example, the NZD pairs might go sideways and become choppy ahead of an interest rate news driver for this currency.
How Can Traders Identify a Choppy Forex Market
A choppy forex market can be identified with multiple time frame analysis. You can set up all 28 pairs, grouped by individual currency, then analyze the market daily using multiple time frame analysis and our forex market analysis spreadsheet. If you understand the condition of the market before entering any trades, then your odds of making great, trend based trades goes up substantially. Looking at one pair is not enough. Some traders think that if the EUR/USD is choppy, the whole market is choppy. That is not the case.
We monitor 28 pairs and 8 currencies. When you review the market and you see 3 or 4 choppy pairs, that is normal and customary. When you see over 10 pairs you consider choppy there is still not much impact on trading. But when the market gets to about 20 pairs or more choppy it starts to impact all trades. So a choppy market can be described this way.
How Do Choppy Markets Start
If the market is mostly trending across many pairs on the H4, D1 or W1 time frames, generally speaking, the market is moving almost every day. If a large group of pairs starts to consolidate as the trends come to an end, a choppy period may start. As the trends end, the market starts to go sideways on a large group of pairs, creating choppiness on these pairs or groups of pairs.
Look at the example above. This is the EUR/NZD pair. It is trending down on the D1 time frame for 15 days but finally stalls and consolidates for about 7-8 days. This means that for 7-8 days the market is going sideways not only on this pair, but likely for up to 7 other pairs in the EUR or NZD group, depending on what currency drove this pair down. If you have several pairs or groups of pairs consolidating at the same time, the overall market can go from trending to choppy. Consolidation periods are normal and the market takes a break as pairs need to determine what direction they will take next. Now, if the above image of the EUR/NZD was the W1 time frame, then the consolidation/choppy period could last for many weeks.
How To Know When A Choppy Forex Market Is Ending
If the market as a whole is choppy, not trending or going sideways, at some point the market will start to give off signals that it is starting to move and trend again. When the market is not trending, traders can start looking for these signals that movement is starting again.
For example, if you see strong signals on The Forex Heatmap® in the main trading session, look for pairs breaking out of their ranges in real time. Strong heatmap signals can indicate change in sentiment and the formation of new trends, especially when news-driven. If a group of pairs starts to line up near support and resistance, this is an indication of imminent movement. For example, if all of the EUR pairs are nearing some critical support, set audible forex price alerts to detect the support breakouts so you can be notified.
Also, look for pairs forming new H4, D1 or W1 time frame trends, this will signal potential movement. It also signals a possible end to the choppiness on several pairs or a group of pairs. For example, if all of the CHF pairs are forming new D1 trends based on CHF weakness, it should be obvious. Analyzing the market daily with multiple time frame analysis will expose this. Look at the example above. The EUR/CAD is close to breaking out of a consolidation zone and forming a new uptrend with about 300 pips of upside.
How Traders Should Approach A Choppy Market
If a trader identifies a choppy forex market, they have several choices of how to approach it. One choice is to not trade at all; another choice is to trade fewer lots per trade. For example, if a trader normally trades 5 mini lots per trade, he might choose to trade only 1 or 2 mini lots per trade until the market starts to trend again or range in wide ranges. Wait for the choppiness to disappear. If you enter a trade in a choppy forex market, you can also scale out lots much sooner or be willing to completely exit trades sooner and adopt more of an intraday trading style. Since we trade 8 currencies and 28 pairs with our trading system, it is easy to move to another currency looking for opportunities with more stable trending pairs. For example, if all of the EUR and CAD pairs are choppy, it is easy to move over to the GBP or USD pairs to look for pairs that are trending or ranging with smooth cycles.
In a choppy market any trades taken should be accompanied by strong, consistent signals on The Forex Heatmap ®, to minimize the effects of the choppiness. An example of a strong signal for buying the EUR/CAD is shown below, the CAD is weak on all pairs.
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Choppy Forex Market Versus Choppy Pairs
It is rare when the entire forex market is choppy. If the EUR pairs are choppy just move to the CAD or USD pairs looking for trading opportunities or trends. We trade a total of 28 pairs with our trading system. If the overall market analysis using multiple time frames reveals that about 20 pairs or more are choppy at any particular time, we would consider the market as a whole to be choppy. Having this many pairs choppy begins to affect some of the remaining pairs that might be trending. If you have a handful of choppy pairs, like 5 or 6 pairs, that is normal because usually, on a day to day basis, some pairs are consolidating. Too many choppy pairs makes the market as a whole become erratic.
Conclusions about Choppy Forex Markets - In this article we have showed traders how to identify a choppy forex market with multiple time frame analysis, ways to approach trading a choppy forex market, and how to monitor a choppy forex market for when pairs start to trend again. If the market is currently choppy, there is plenty of work to do monitoring the market for the next round of breakouts and trends to appear. Choppy markets, tight ranging markets, and many pairs consolidating at the same time occurs frequently, so forex traders must learn to identify and handle these market conditions.