Let us study the market conditions in order to select an appropriate trading system
The key indicators to find out the current market state are volatility and the trend strength. The first one shows how much a currency pair quotes are changing; it can be measured with the indicator of the Average True Range (ATR). If it increases, the volatility is higher, and vice versa. To make sure what the market volatility is, strong or weak, you need to compare the current indicator’s data with the history. To identify the strength, and, what is also very important, the direction of a currency pair trend, you can use the Average Directional Index (ADX)
It is commonly believed that if its value is more than 25, the trend is strong; if it is less than 25, there is a consolidation.The indicator’s high can be reversal signals. If its +DMI component exceeds -DMI, then bulls are dominating, and vice versa. Therefore, by means of technical tools, you can identify the market conditions as well as by fundamental tools. Another matter is how to apply this information.
When the volatility is low and the trend is strong, the best strategy is buying highs or selling lows (Turtling). The rule of “buy high, sell much higher” is the most winning strategy here. In case with the Australian dollar, ADX>25, the price volatility is low, the market is dominated by bears, the price isn’t likely to rebound. It makes some sense to enter short trades at the breakout of September’s low.
Strong steady trend and rising volatility will suit trading on the rollback the best. You need to identify the point of correction exhaustion and open a position in the current trend. You can use moving averages, diagonal support and resistance levels, and other tools of technical analysis. In the GBPCHF daily chart, ADX>25 and the volatility is increasing. The only thing that doesn’t match is an extremely high value of ADX. If it goes on like this, the trend may reverse soon.
The market that features low volatility and the weak trend may seem to be boring. In fact, the cyclic nature of price moves in Forex suggests that consolidation will finish sooner or later and will be followed by a new trend. You just need to be patient enough and be ready to trade, according to some breakout strategy. For example, in the EURUSD price chart, ADX<25, volatility is declining. To enter middle-term trades, you need expect the test of the bottom or the top borders of the consolidation range 1.15-1.185.
And finally, the situation, when the volatility is increasing and is higher than its previous values, and the trend is weak, it is the best for day trading with small profits. Traders haven’t determined the further trend direction for AUDNZD, so you can use scalping to enter the trades.
So, the combination of ADX and ATR indicators lets you quickly select the trading instrument that suits your trading style the best.
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Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.