Market Conditions Not To Trade
There are good times to trade and there are bad times to trade.
It’s important to know the difference.
Every trader wants to make money, and the only way to do that is to be in the forex markets. When the markets are not moving right, being in the markets can be a bad proposition. Not taking a trade can save you from losing money, and when the markets are chaotic, losing money is the only thing that can happen.
Basically, anything that doesn’t look like the chart above should be cautiously analyzed. There is an element of common sense as to what kind of market should be left alone. If there are no discernible peaks or valleys, if the market is chaotic looking, if there is no rhythm to it, if the white spaces are filled with candle wicks, these are all things to be avoided. In this Forex Education article I will tell you when shouldn’t trade.
Below I will list a handful of conditions that you should consider stepping aside for.
– Alternating Colors :
The market is making alternating colored candles, similar in length, one after another. Below you see an example of the EURUSD Daily chart where there was a period where the market was extremely undecided.
Alternating colors are a sign of strong indecision. At this point, anything can happen. The market could take off in any direction with little or no warning.
– Railroad Tracks :
Railroad Tracks are a set of 2 candles next to one another. They are longer than average and they both are different color. The market shot up and then right back down again, or bolted down only to immediately rebound. This is often fundamentally driven, and often there is something more to follow. This is an element of “oops, we made a mistake” by the market participants. From here, things can get tricky.
Railroad Tracks can also mess with your indicators, your levels of support and resistance, your hair-do and where you place your stops. Many times railroad tracks will have you placing huge stop losses on an unreliable trade. Until things sort themselves out and establish a flow once again, I like to sit on my hands.
– Wicks (the Centipede) :
There is a scenario where you will get a market that is very undecided and will form many longish wicks on both the top and the bottom of the candles. The market rallies and drops off very quickly. It will do this over and over, and at this point there is no method to the madness.
These wicks will look like the legs of a centipede. During this phase, the market can wander up wards, downwards or just sideways. In any direction, there is still an undecided direction in the market. The bulls and the bears are fighting it out and they are equally strong. Knowing who will give up first is difficult, as it could be anybody’s game. And you can read about this in our category Forex analyzing Education.
Wicks form poor peaks and valleys, and in a centipede, there will be non distinguishable peaks and valleys.
– Saw Tooth :
The saw tooth is a market condition where price is moving in a very tight range, not forming clear highs or lows, but is definitely moving.
A saw toothing range is kind of like the junk drawer of candle formations. You will have everything from tiny dojis to longer engulfing to long wicks to spinning tops and so on. It’s a random mash of nothing cool.
Very difficult to trade and will likely stop you out before hit your target.
You will find sideways markets before and after many news announcements, and depending on the timeframe you are trading, throughout the day in the off sessions.
A sideways market is just that, price is moving sideways and making very small undefined candles. When price is in these little ranges, the indicators are forced to interpret the market in some manner, so will get a lot of fake divergence trading signals that mean absolutely nothing.
In the above example, you see the USDCHF doing absolutely nothing at all. At this point, there is no battle between the bulls and the bears, they are content to have picnics and campfires. You can try to provoke them by placing a trade, but they will most likely just ignore you.
Eventually the pyjama party will come to an end, one of the bulls will say something inappropriate and the battle will ensue, but when this will happen and who will get the immediate upper hand will be hard to determine.
– Shark Tooth
This will make sense when you see the charts. The market makes very quick and sharp highs and lows. The flow is very erratic and the highs and lows are quite close together, even though the price does move quite a distance.
“Long and sharp” are the key defining words to describe a shark tooth market.
– Long Entry Candles
The setup is perfect, the divergence is clear and the trendline is awesome, you did a great job finding the setup and watching it form. Finally we get a cross past the trendline, and the entry candle is HUGE, twice or more the length of the average candle in the neighbourhood!
Do we take the trade?
For me, no. When you have a much larger than average entry candle, your stop will have to go too far away, and the large candle may have used a lot of the move the divergence trade should have banked.
– Lack of Wedge formation :
I love the Wedge. We know it as Trendline Divergence; it is a beautiful sight to behold. As price climbs, it fails to move farther away from the trendline, show us depleting energy or momentum. If this wedge formation is not formed, I believe there is still power in the trend and will wait for a more wedgie formation. Below is an example of a nice falling wedge formation.
The wedge is depicted when a trend line and the divergence line look to be coming together. If you were to extrapolate the two lines, they would come merge in the distance. The opposite of this is when the two lines are extrapolated, they would either stay parallel to each other or move apart from one another. The example below shows a separation of the lines rather than a coming together. A non wedge formation.
This seems like a lot of different instances where you would not take a trade.
Fortunately for us these don’t happen all the time. The market moves in a tradable manner a lot more regularly than any of the non-tradable examples in this manual.
It is important to be aware of what kind of market conditions you could lose your shirt in. When things aren’t as they should be, it’s a wise thing to either pass on the trade or just sit it out until things become normal once again and don’t forget Money Management.
There is nothing wrong with not trading when the opportunities aren’t choice. Don’t confuse not trading bad markets with hesitation or fear, that’s not it at all. Sitting out bad market conditions is the best position you can take as a trader.