One of the difficult phases is when a market trades sideways. How can a trader tackle choppy markets?
City Index July 16, 2012 8:40 PM
<p>Every trader would like to enter a trade and see the market move in the expected direction for several hundreds of points. But as we […]</p>
Every trader would like to enter a trade and see the market move in the expected direction for several hundreds of points. But as we all know this is not always the cases. There are times when the market will enter a trendless stage.
What’s the best way to trade when we encounter range bound markets?
For some traders, a range bound market is ideal. Options traders can benefit from such environments as they would be looking to Write Options and collect premiums. At the same time there are other traders who like to use oscillators to buy and sell as the market bounces up and down within a certain price zone.
But there are trend traders who find that a directionless market can be a frustrating time to trade. When a market has no clear direction and a trade is live it can put a trader in position where they are constantly watching screens to see if their trade is delivering the results they anticipated. This can turn out to be dangerous because in some cases the trader may out of sheer boredom place another trade simply because of a “lack of action.”
Trading sometimes can be boring when there is no definitive action. And this in itself is the exact opposite of what many new traders did not expect. Newcomers enter this business looking for excitement and suddenly realise that markets can and do sometimes do nothing. When a market is range bound and especially when the range is narrow, it creates a dull trading environment. But it is important to understand and accept that markets will at times go through a stage of consolidation.
Currently gold has been frustrating to trade. The commodity has traded in a sideways phase for several weeks. Each time the metal reaches higher it appears that it may move higher only to fall back lower. And on its decline some traders are anticipating a further fall only to be met by a reversal yet again.
At times like this it is very easy to give up or try to force the trade to do what you want to do. But sometimes sitting on the sidelines waiting for a clear signal is what is required.
For traders who are willing to trade during choppy phases one of the tools that can potentially be useful is to trade Breakout Patterns. Essentially this is where the market has traded within a price zone and one would wait patiently for the breakout either on the upside or downside. It is important to pay attention to the trend prior to the trading range as this can sometimes provide relevant information. For example a market could have previously been heading lower and then enter a trading range. This suggests that we may be entering a consolidation followed by a trend continuation to the downside and hence trading the breakout of the lower side would make sense.
We should also bear in mind that false breakouts can and do occur. And therefore it is important to utilise Stop Orders to protect capital.
Another aspect to bear in mind is if a trade has been initiated and a stop order has been attached to the trade based on price, a useful function which is overlooked is to have a time stop. This means that if the trade has not performed as expected within a certain timeframe then the trade can be closed.
Although trading breakouts can be a lengthy subject, the purpose of this article is to highlight that trading ranges can and will occur and when they do a plan of action is required.
Will you trade the breakout of a range or will you buy and sell at the tips of the range? How long do you hold your trades for and will you use a time stop?
Much has to be considered but in future articles I will also cover examples of trading ideas in action as they occur. But as the summer months approach and quite often this is a time when markets can become range bound it may be useful to consider how to keep your emotions intact during dull markets.
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