What to Look for in Price Action in Choppy Forex Markets
The foreign exchange market started September with a boisterous attitude, after the prospects of a warming peg of the pound against the US dollar – once unthinkable – now began to look more and more like reality.
But Like other developed countries in the West, the UK economy has seen its fair share of blows this year so far. The threat of an impending recession, the acute dependence on foreign capital, the rising cost of debt and the likelihood of independence from the Bank of England have all been major headwinds for the country as it tries to recover its post-pandemic economy.
Earlier this summer, forex investors were caught off guard when the euro managed to reach parity with the dollar for the first time in more than two decades.
Overall, currency markets have entered uncertain territory in recent months as many countries – those with dominant currencies – struggle to gain control by curbing runaway inflation with aggressive rate hikes. interest and increasing the overall cost of borrowing to help cool off. market conditions.
Here in the US, the market’s outlandish performance has also left many investors scalping the market in hopes of hedging against a possible recession.
Late last month, Federal President Jerome Powell predicted that rising interest rates and slowing growth in the overall economy and labor market could potentially lower inflation. Powell went further saying, “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
Investors have rushed in all sorts of directions since Powell’s speech, as the federal committee seeks a move away from monetary tightening in 2023.
Spirits were nonetheless at a loss, with many still looking for the small window of opportunity that might help them shift positions should unruly waves crash into the market.
Forex markets have cooled since Powell’s hawkish remarks at the Jackson Hole symposium on Friday August 26, and investors have managed to rebound and erase small daily losses.
As the markets trade nearly upside down, some investors are looking to price action trading as a window of opportunity. Yet these strategies have evolved beyond arbitrage, as traders look to watch the needle move from the middle price range, hoping it will return to the baseline.
Therein lies the misconception of traders looking to get that many trades in before the needle moves again. Unless you already have a working scalping strategy or are constantly following market trends, the best course of action would be to focus on a limited number of currency pairs – for now, at least until now. until conditions have calmed down again.
To clear things up, I looked at three aspects, among many others, that should pique more traders’ interest as a way to underpin better trading.
Of course, there are a multitude of things to consider in price action trading, and it’s not as simple as scalping the market. Perhaps these aspects could lead to a better understanding of how forex prices move against broader market indicators and provide a framework that can help better strategize.
Having a consistent analysis that you can follow will help you get the analysis points right more than once. It is important to consider your consistency as it plays a big role in your daily, weekly or monthly performance.
The consistency of the analysis is composed of three slices. First, traders must minimize the effects of recency bias, and it is difficult to do so given the continuous fluctuations in the market. Being swayed by the outcome of events only leads to greater disregard for your analysis.
Second, while your analysis may prove successful, it is common for your morale or confidence level to automatically become inflated. Being confident is one thing, but being overconfident can hurt your baseline and expose you to a host of new problems.
And finally, consider the importance of a checklist to help you build your analysis. Having a checklist helps you cover all the reasons and the most important steps of the analysis. If you miss one step, your whole analysis may collapse.
It takes more getting used to, but the sooner you start using different strategies that can help drive meaningful analysis, the sooner you’ll become familiar with the idea. As it stands, a little consistency is all you need right now to help you navigate choppy waters.
Support and resistance levels
Almost every forex trader or investor has some form of support and resistance indicators built into their strategy; it’s almost a given.
Three important pillars of support and resistance include; market direction, time of market entry and market exit times. Whether you are trading against a profit or a loss, it helps plan your exit strategy.
But what many newer and less experienced traders fail to realize is that support and resistance levels need to be watched, as they tend to change with price movements.
Additionally, traders should also consider the type of trading strategies they will use for their support and resistance levels. I have found that range trading, pullback, trendline and moving averages are the most useful for support and resistance as it gives you more leverage to control and adapt your analysis and overall strategy as you go. as you progress in each trade.
Generally, directional uncertainty would cause you to exit before considering what the potential short-term results will be. This is where you will need to revisit your consistency analysis and minimize the influence of recency bias. For a strong change in direction, consider how a pullback towards the point of resistance will help you avoid a false breakout.
The most challenging aspect of price action trading is incorporating indicator confirmation to help confirm analysis. You can include indicator confirmation beforehand or as you trade to help you build an accurate reflection of the market.
To begin with, we know that indicators work in mathematical formulas that work against the background of the market. This is what makes it so difficult to follow, which means that if your analysis is inconsistent with an indicator, you may miss your target almost completely.
More so, indicators help identify a price breakout; Additionally, technical indicators can also help determine the start and trajectory of a breakout. This gives the perfect open position at the start of the move to help build better analysis and follow a basic strategy.
So, what do you then use as a technical indicator to help you determine or identify potential breakouts?
To start, you can consider the MACD or the moving average convergence/divergence indicator as a basic tool. This is usually a more common choice for forex traders in price action trading, as it helps them understand the momentum behind a breakout. The MACD also makes it easier for traders to get a close position when momentum cools.
Then, for relevance in assessing the potential breakout, traders turn to the Relative Strength Index or RSI to scale the buying tendencies of currency pairs in the broader market.
The reason the RSI works so well, in most cases, is that it helps determine whether a currency pair is overbought or oversold, allowing traders to better analyze a potential breakout point. The RSI helps monitor conditions, but lagging data and information can leave traders in the dark.
Other trading strategies that can also help traders are Slow Stochastic Bands and Bollinger Bands, both of which can help identify breakouts, but are also a good combination of strategies for both new and seasoned traders.
An honorable mention
As an honorable mention, I thought it would be interesting to include the bid-ask spread in price action trading.
Without having to go back to the most basic principles of the bid-ask spread, traders should focus more on working with a variable or fixed spread. Current conditions might make this the perfect time to use variable spreads, but fixed spreads have their fair share of positives when market performance suddenly slows.
In the case of price action trading, traders need to consider the instrument they are trading and its liquidity. For optimal results, it’s best to consider your market position and account size, and experts such as ForexFactory suggest that executing during peak hours is important for traders looking to profit. larger fluctuations based on variable spreads.
It is quite simple to understand how price action trading in the forex market works; it’s right there in the name itself. Although it’s easier said than done, the real results are reflected in the performance strategy and components you used.
The general rule is to keep a good footing on both sides of the market to help you better determine market volatility and price breakouts and establish an entry and exit point.
It’s also important not to be swayed by the myths and misconceptions that fill the forex market, but rather stick to your strategy, build and upgrade as needed, and see how point you can follow the needle throughout the current swings.