3 Tips in Adjusting to Low Volatility in the Forex Market

Updated from its original posting on 2012-12-07

The summer season is almost upon us, which means that you should be thinking about adjusting your trading strategy to adapt to a less volatile market environment. While some traders like to sit on their hands and wait for the golden times of higher volatility, others take this as a challenge to expand their trading skills.

If you want to try your hand at trading in low volatile market environment, here are three tips that might help you:

1. Focus on Range Trading

Perhaps one of the first things that you should learn when trading in a low volatility environment is to trade in shorter-term time frames. Put trend-catching systems on the shelves for now and explore trading strategies that work well in a ranging environment.

If you don’t want to veer away from your current system, you can also slowly add in indicators that do well in a ranging environment. You can try out indicators like Stochastic, the RSI, and the ParSar. For more information on how to use them, just head on over to the Leading and Lagging Indicators lesson in the School of Pipsology.

2. Trade Currency Crosses

Stepping away from the major pairs can open up a new world of opportunities. These seldom watched currency cross pairs and exotic pairs naturally have low liquidity. This means that volatility may be higher, especially on big news events.

Also, cleaner price moves can be found in these pairs as they tend to be influenced more by a country’s underlying fundamental outlook rather than “risk-on/risk-on” sentiment and daily market noise.

Take note, however, that the spreads may be higher and the value-per-pip move will be different than what you normally see with the more popular pairs. If you’re not aware of that when you set your position sizes, you could be in for a rude awakening as soon as that trade opens. During violent shifts in market sentiment, the odds of your limit order getting filled at your desired entry price is greatly reduced (i.e., a higher potential for slippage). But as with any trade, a good risk plan and a careful eye on the market will limit any damage these risks have on your account.

Cyclopip, our resident cross-currency expert, trades crosses and exotic currencies very well. You can check out his blog for ideas on how to take advantage of these types of currencies in a low volatility environment.

3. Manage your Expectations

Just as a surfer adapts his/her stance to the wave direction and momentum, your trading  expectations and decision-making must also adapt to low volatility trading. Accept that you won’t be seeing multi-hundred pip moves as often as you want to; you can forget about adding to your existing positions and start thinking about smaller targets for a majority of your trading sessions.

Smaller pip targets doesn’t necessarily mean less profits. You can always make up for the lack of volatility by trading bigger positions and placing tighter stop losses. But be prepared for the psychological impact of trading larger positions!

Aside from that, you should be ready for breakouts. A low liquidity environment will most likely induce spikes in buying and selling. So, be prepared by having plans in place to limit risk during surprise events and to take advantage of them if they happen.