The recent market environment in the forex world has been challenging to say the least. Many inexperienced traders who refuse to recognize these conditions continue to employ strategies that do not perform as well as they did previously. Many more get discouraged and quit trading altogether. The key to getting through tough conditions is to first acknowledge the particular conditions and then adapt a more conservative behavior.

Understand the signs.

If you look at the ATR of the EUR/USD of a year ago and compare it to today, you will notice it has been reduced by half. If you look at average daily volume in the currency futures, you will see a much lower number today as well. After speaking to a former colleague who now does settlements for forex transactions for a global investment bank, I learned that hedgefund and money manager activity has been very slow. Take a look at the historical prices of the large forex brokerages along with other similar companies and you will see a bearish trend. These are all signs of the health of our business. And I don’t see any real signs of improvement.

If the big guys aren’t seriously trading, and the little guys are also giving up, you are going to get an environment of chronic low volume. When combined with sporadic high volatility events such as those coming out of Europe, or the fiscal situation in the U.S., you have a mostly sluggish, low follow through market littered with occasional price spikes. Sound familiar?

Observe and Adjust

Once you acknowledge the level of difficulty in the environment and also recognize that it can get tougher and stay this way for a while, you have to adjust your expectations and your behavior. If you lack experience or a robust methodology you will not be able to do this effectively. For those of you that do, the solution is simple: Be very selective. Require all of your criteria to be in line and minimize taking the trades that show only partial criteria. The next best solution in my opinion is to use this time to further develop your education. I believe that if you learn how to trade effectively in a hard environment, you will be that much more prepared when conditions improve.

When Will It Get Better?

I get this question a lot. And my answer is when there is more certainty in the market. This can come from political leaders, monetary policy changes, etc. Also a general sense of trust needs to be restored in the financial markets that has been shrinking for some time. This is more likely to happen in a bull market, or in an economic situation that is significantly improving. Not exactly what we have going on at the moment. So be patient. This is going to take time. How much? I don’t know.

Keep in mind, a tough environment does not stop a good trader. A robust methodology allows for flexibility and adjustment. Experience is your guide to filtering out all the lower quality opportunities or adjusting to compensate for the added risk. Remember in these markets, the trader who has the ability to wait for the most attractive opportunities and the confidence to act only at those times is the one who makes it through. If you are having a tough time, don’t blame the conditions, instead take the time to improve your skills and build practical experience by further educating yourself. As long as the markets move freely, opportunities exist.

Marc Principato, CMT

Risk Disclaimer

*No Relevant Positions