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Survival Tips for Low Volatility Market Conditions
Low Volatility Market Condtion
Every so often, conditions will manifest in the Forex markets producing a trading environment that will put serious strain on your trading strategy. We’re talking about market conditions so boring, it’s about as fun as watching the grass grow. Daily trading ranges shrink down, the charts flatten out, and indecision causes brutal price churning. You probably guessed it, I am talking about low volatility markets!
Any kind of low volatility environment is a Forex trader’s worst nightmare. It doesn’t really matter how good you think your trading system is. Low volatility means very poor price movement. No price movement equates into minimal trading opportunities for us Forex traders.
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Traders beware: It doesn’t matter how good you think your trading system is. Low volatility markets drive you to the threshold of your discipline and can cause account burnouts.
Low volatility can hit your trading performance harshly if you don’t show the proper respect for the situation. In today’s article, I am going to give you a few survival tips which can help you deal with poor trading environments that low volatility markets create.
Why is Volatility Important Anyway?
Volatility is a Forex trader’s best friend. It creates fast moving markets that allow traders to profit from the markets. Nearly all trading strategies will depend on good market volatility to function at a profitable level.
Without sufficient volatility, the charts will lack direction. Non-directional markets are very painful for Forex traders, especially for us swing traders.
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Exposing any trading system to markets suffering from low volatility is the equivalent of flogging a dead horse.
Let’s have a look at some of the things you can do to avoid being caught up in low volatility ‘churn and burn’.
Find something to distract you
The markets are quiet, nothing is happening and you have that itching feeling that you need to be more involved with the market, a common Forex trading mistake. The temptation is overwhelming because the recent low volatility has restricted you from pulling the trigger on any trades. Nothing is meeting your trading system’s setup criteria and it’s making you very unsettled.
Try not to let it get you all worked up. The reality is you can’t control the market conditions, but you can control your actions in the market. Maintaining that control and discipline on your end is going to be the dealbreaker determining if you ‘weather the storm’ or not.
Sitting in front of the charts waiting for something to happen will put you in a dangerous situation where you might be tempted to force a trade purely out of boredom. We’ve all done it, the result is never good, and you will regret your actions.
If the market isn’t moving, and low volatility conditions are producing very poor trading opportunities, there is no reason for you to be sitting there in front of the trading screen.
Find something that will distract you and keep your mind off the markets. Some people like to get out, play a sport and keep fit. Other traders I know love their video games. Find something that you enjoy and go do it. Don’t be a slave to the charts.
Adjust your risk reward to fit
In the War Room, we generally like to achieve a 300% ROI on our trades, or ideally more. That’s a risk reward ratio of 1:3. During periods of low volatility price movements hardly have the momentum to push through to those 3x targets.
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As a temporary measure you can back off your risk reward targets to 1:2 in anticipation of the weaker price follow-through. I wouldn’t recommend dropping before 1:2 however. Any lower than that will start to put pressure on your capital growth. The last thing you need to worry about in low volatility markets is increasing your win rate.
Quality not quantity
Back in my earlier days as a trader, I used to make the mistake of opening too many positions at once. I would trade multiple signals across the market at the same time. Frequently trading up to 3 setups at once. The problem was most of these signals were generated from correlated price action. If one of the setups failed, there was a good chance the rest would fail as well.
Opening multiple trades at once seems like the smart thing to do at the time, but it never ends well. Think about how many times you’ve opened multiple positions and walked away a huge winner. Having a few positions open may also push you beyond your normal risk tolerance, especially when they all go into the red. Emotions will flare up and put you in a dangerous mindset where you may act irrationally. There is nothing worse than a forex losing streak.
Opening multiple positions is even worse during periods of low volatility. The market is already being difficult, you only compound the problem by opening up a sizeable amount of risk in slow-grinding markets. The best way to avoid this kind of unnecessary overtrading is to stick to the one position at a time rule.
If you only have one trade open, you’re less prone to emotional episodes, over risking into correlated movement and able to maintain good risk management.
You’re not a bad trader if you don’t take a trade for a whole week. There will be some weeks where the market just moves sideways and doesn’t offer any good trades. These are generally followed by periods of strong impulsive market movement where the daily time frame makes new highs, or lows every day. The feeling like you have to be involved in the market all the time is trap in itself.
If you feel like you’re getting bored with the markets because they aren’t offering any good signals, then you need to take a step back. Don’t take trades out of boredom or to satisfy a need to trade regularly. As mentioned above, finding something that will distract you from the trading screen to get your mind off the charts will go a long way in maintaining a healthy attitude.
DON’T rely on indicators to save you
If you’ve read some of the other articles here on The Forex Guy blog, you’ve probably figured out we don’t trade with indicators. But for those traders who do stick by their indicators, have your wits about you when the Forex market experiences low volatility.
Indicators will betray you when the market consolidates by generating bad buy or sell signals which trap you into low probability trades. Signals from indicators may seem technically sound, but are a result of the indicators inability to identify hostile trading environments and simply can’t function correctly in flat conditions.
During thin, low volatility markets, indicators become very sensitive to price movement. The longer the consolidation, the more sensitive the indicators will become. A small move can make your indicators shake like a leaf in the wind, generating horrible buy and sell signals that trap you into trades of regret.
Don’t ignore the price action. It’s the most valuable piece of information on your chart. Focus on what the price action is doing, not the indicators. We use price action signals to base our trading decisions on, not some ‘black box’ indicator system that you don’t truly understand.
Low Volatility Warning signs
There is no magic rule which will determine the exact time the market will dry up and see volatility disappear. The general cluttering, churning, or ‘boxing’ of price action are the first signs of poor trading conditions and low liquidity.
Generally the market will pause in anticipation of the next move from central banks. There is generally a ‘theme’ or ‘situation’ surrounding market consolidation like a debt crises, or if a central bank is going to print money or not.
The market wants to know what action the government‘s will take to respond to the ‘crisis’ at hand. Governments and banks are fast to acknowledge the problems, but are slow to respond. The time difference between acknowledgement and action is when we see market activity die off and periods of low volatility.
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Notice how the EMA’s just flatten out when the market momentum dies out.
Once a ‘solution’ or decisive action is taken from the higher powers of the Forex market. The charts will seeing a strong rally, or sell off reflecting the outcome of the problem.
Conclusion
The good news is volatility comes and goes. The market will swing from tough times when nailing a good trade seems impossible, to times where you could almost buy or sell at any point and make some returns. You could almost go as far and say the market goes through mood swings. This is nothing new, it’s been happening throughout history.
Something to look forward too are those strong breakouts. After lengthy periods of indecision the market will eventually explode with movement. Check out the gold chart below.
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This gold market formed a price squeeze pattern that drove this market into a wedge. Something eventually gives. As you can see the breakout was severe. When the gold markets go bearish, it’s usually a sell off frenzy.
Whatever you do, don’t blame your trading system. A lot of traders will get frustrated with the inability to make money during periods of low volatility and try to ‘tweak’ their system to ‘fix it’. There is nothing wrong with your trading system. You can only take what the market offers you at the time.
The only thing you should be tweaking is your money management, adjusting it to suit market conditions. In the price action protocol we teach a very powerful money management model called the ‘split money management system’. It’s very effective at removing 100% risk from your trade setup without having to adjust stop losses. It’s a powerful tool to have during periods of low volatility and may of the war room traders are taking advantage of its benefits.
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Elliott Wave Principle: Key to Market Behavior
Elliott Wave Principle : Key To Market Behavior
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Developed by Ralph Nelson Elliott in the 1930s and '40s, the Elliott Wave Principle is a powerful analytical tool for forecasting stock market behavior. The basic concept behind the Wave Principle is that stock market prices rise and fall in discernible patterns and that those patterns can be linked together into waves.
In the years since it was first published, this classic guide to the Elliott Wave Principle has acquired a cult status among technical analysts, worldwide. And with each new edition, the authors have refined and enhanced the principle, while retaining all the predictions from past editions.
The 20th Anniversay Edition includes a special foreword and enhanced text. It’s the final revision of a classic.
"Elliott Wave Principle is simply the best description and validation of a concept which by all rights should be revolutionizing the scientific study of history and sociology." –JWG, New York
"Elliott Wave Principle is such an important, fascinating, even mind-bending work, we are convinced that is should be read by any and every serious student of the market, be they fundamentalist or technician, dealing in stocks, bonds or commodities." –Market Decision$
"Even allowing for minor stumbles, that 1978 prediction must go down as the most remarkable stock market prediction of all time." –James W. Cowan, Monitor Money Review
"Elliott Wave Principle is the greatest work of any kind, anywhere. It has helped me abandon speculative stock tips and stockbroker newsletter recommendations for my own predictions based on the simple wave theory." –J.V.
"I have just received my copy of Elliott Wave Principle and find it to be unquestionably the best book and explanation regarding the works of Elliott that I’ve ever seen." –J.B.B.
"I have recently read and reread Elliott Wave Principle. I was impressed with the research and especially thrilled with the excitement of coming into contact with a truly original concept." –M.F.
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The ‘Most Successful’ Price Action Trader in History: Munehisa Homma
Most Successful Price Action Trader in history : Munehisa Homma
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Munehisa Homma (本間 宗久 Honma Munehisa?) (also known as Sokyu Homma, Sokyu Honma) (1724-1803), was a rice merchant from Sakata, Japan who traded in the Dojima Rice market in Osaka during the Tokugawa Shogunate. He is sometimes considered to be the father of the candlestick chart.
Until about 1710, only physical rice was traded but then a futures market emerged where coupons, promising delivery of rice at a future time, began to be issued. From this, a secondary market of coupon trading emerged in which Munehisa flourished. Stories claim that he established a personal network of men about every 6 km between Sakata and Osaka (a distance of some 600 km) to communicate market prices.
In 1755, he wrote (三猿金泉秘録, San-en Kinsen Hiroku, The Fountain of Gold - The Three Monkey Record of Money), the first book on market psychology. In this, he claims that the psychological aspect of the market is critical to trading success and that traders' emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market when all are bearish, there is cause for prices to rise (and vice versa).
He describes the rotation of Yang (a bull market), and Yin (a bear market) and claims that within each type of market is an instance of the other type. He appears to have used weather and market volume as well as price in adopting trading positions.
Some sources claim he wrote two other books (酒田戦術詳解, Sakata Senjyutsu Syokai, A Full Commentary on the Sakata Strategy) and (本間宗久相場三昧伝, Homma Sokyu Soba Zanmai Den, Honma Sokyu --- Tales of a Life Immersed in the Market).
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He lived from 1724 to 1803 and even if half of the legends about him are true, he was by far one of the most amazing traders in history and we can learn a lot from the stories that surround him. Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading.
You should probably listen to a “Samurai trader”
Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading in the Japanese rice markets. In fact, he was such a skilled trader that he served as an important financial advisor to the Japanese government at the time and was later raised to the rank of honorary Samurai. I don’t know about you, but I think it’s pretty safe to say we can learn something from a guy who was such a great trader that he become a Samurai because of it, to me that is totally cool in what is probably a semi-nerdy kind of way. Rumor has it that he once had 100 profitable trades in a row….granted there’s a bit of an advantage when you are basically the “inventor” of technical analysis and no one else really knows about it yet…but clearly Homma was a force to be reckoned with in the markets and his legend lives on today.
Homma began recording price movements in the rice market on paper made out of rice plants. He laboriously drew price patterns on his rice parchment paper every day, recording the open, high, low and close of each day. Homma began seeing patterns and repetitive signals in the price bars he was drawing and soon started to give them names, including some of the popular Japanese candlestick patterns that you are probably already familiar with like Spinning tops, Stars, Doji’s, Hanging Man and others, each pattern clearly conveyed a specific meaning and Homma began using these patterns to predict the future direction of rice prices. The discovery of the price action patterns left behind by the movement of rice prices gave Homma a huge advantage over other traders in his day, and combined with his passion and skill for trading, this advantage is what allowed him to become one of the most successful traders ever, if not thee most successful trader ever.
To any of you reading this who may still be “on the fence” about the relevancy and effectiveness of price action trading, consider the fact that it was used centuries ago by Homma and others and it’s still effective in today’s markets. I cannot think of any other trading method, system, indicator or robot that has been effective for that long and stood the test of time as pure candlestick price action trading has. Whether or not Homma knew the term “price action” in his time is irrelevant, he was clearly trading from the pure price movement of the market and he was the first person who realized the advantages of focusing one’s attention on a market’s price movement to predict its direction.
Homma realized price action reflects market psychology, and used it to his advantage
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In Homma’s book “The Fountain of Gold – The Three Monkey Record of Money”, which he wrote in 1755, he says that the psychological aspect of the market is critical to trading success and that traders’ emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market when all are bearish, because at that time there is cause for prices to rise (and vice versa).
In other words, Homma was the first trader to realize that by tracking the price action in a market he could actually “see” the psychological behavior of other market participants, and make use of it. As it relates to the price action strategies that I teach, this could mean for example that after a large run up or down in a market a long-tailed pin bar signal can give rise to a large move in the opposite direction. I imagine that Homma was the first person to trade a pin bar signal and I’m sure when he realized the power of the signal he got goose bumps all over his body.
Homma also probably took advantage of false break trading strategies by the sounds of what he wrote in his book. I’m sure that he quickly identified patterns similar to what I teach as the fakey setup and saw that they sometimes form at major market turning points just as the last market participants have finally committed to a direction. The tendency of people to jump into a market when it “feels” safe has probably been around ever since Homma’s trading days back in the 1700’s, and it has not changed over the centuries. Homma probably realized this as it’s very evident by studying the price action of a market and using a big of logic and commonsense. In essence, Homma was the first true “contrarian” trader and this is why he is one of my heroes to this day. Using the price action of the market and logical thinking, we can often find high-probability entries into the market while most other market participants are stuck in a cycle of trading mainly with their emotions and from what makes them feel good.
Homma would definitely agree that what “feels” like the “surest” trade is often the wrong one, and once he could start to see the emotion of market participants via candlestick price patterns, this likely became very obvious to him.
The trend has been your friend or over 250 years, so stop fighting it!
Homma described the rotation of Yang (bull market), and Yin (bear market) and claims that within each type of market is an instance of the other type.
I can only imagine the amazement that Homma must have felt when he started to see price trends emerge over his years of drawing price patterns on his rice parchment paper. It must have instantly set off a euphoric feeling in him because he likely realized very quickly that trading with the trend would be the easiest way to make money in the rice markets.
To this day, trading with the trend is still the easiest way to trade. Traders try to fight it by continuously trying to pick tops and bottoms, but trend-trading has long been the easiest way to make a lot of money in the markets. Simply put, there’s a reason for strong trends, so it’s illogical to fight the trend. Homma was the first trader to be able to identify high-probability entry points in a trending market via simple price action patterns. This method has worked for literally over 250 years, and why so many traders still try to fight it and over-complicate it is beyond me.
If Homma was alive today and he saw all the messy indicators and trading robots people put on their charts, he would probably get a confused look on his face and wonder why anyone would behave so illogically and ignorantly when everything they need to find high-probability entries into the market has been right in front of their face the whole time.
Mirrors don’t lie
Homma wrote several books in his time, which are apparently out of print now, but the candlestick patterns he described in his books became known as the “Sakata Rules”. These Sakata Rules became the basis of modern candlestick charting and thus most of what Homma wrote about is still relevant today. The fact that the first person to trade from a price chart and arguably the most successful trader of all time was a price action trader, is really not surprising to me. What Homma discovered, and what many of us now know, is that the price movement on a “naked” price chart reflects everything about a market.
Everything you need to know to find high-probability entry signals into virtually any market is available on a natural price chart. If you want to see your reflection in the mirror, you just go to a mirror and look at yourself. You do not put a wig on or throw a paper bag over your head. Similarly, if you want to see what a market is doing, you simply need to look at its price chart. You do not need to cover up the most accurate reflection of a market with indicators and other nonsense. Munehisa Homma discovered this simple truth about markets over 250 years ago, and to this day many other traders, including myself, are still using pure price action to trade the markets, because there is simply no better way to trade. If you’d like to learn how I trade with price action candlestick patterns and how to trade in-line with time-tested concepts very similar to those Homma and other traders have been using for centuries.
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Bayesian Methods for Hackers: Probabilistic Programming and Bayesian Methods
Bayesian Methods for Hackers: Probabilistic Programming and Bayesian Methods
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The Bayesian method is the natural approach to inference, yet it is hidden from readers behind chapters of slow, mathematical analysis. The typical text on Bayesian inference involves two to three chapters on probability theory, then enters what Bayesian inference is. Unfortunately, due to mathematical intractability of most Bayesian models, the reader is only shown simple, artificial examples. This can leave the user with a so-what feeling about Bayesian inference. In fact, this was the author's own prior opinion.
After some recent success of Bayesian methods in machine-learning competitions, I decided to investigate the subject again. Even with my mathematical background, it took me three straight-days of reading examples and trying to put the pieces together to understand the methods. There was simply not enough literature bridging theory to practice. The problem with my misunderstanding was the disconnect between Bayesian mathematics and probabilistic programming. That being said, I suffered then so the reader would not have to now. This book attempts to bridge the gap.
If Bayesian inference is the destination, then mathematical analysis is a particular path to towards it. On the other hand, computing power is cheap enough that we can afford to take an alternate route via probabilistic programming. The latter path is much more useful, as it denies the necessity of mathematical intervention at each step, that is, we remove often-intractable mathematical analysis as a prerequisite to Bayesian inference. Simply put, this latter computational path proceeds via small intermediate jumps from beginning to end, where as the first path proceeds by enormous leaps, often landing far away from our target. Furthermore, without a strong mathematical background, the analysis required by the first path cannot even take place.
Bayesian Methods for Hackers is designed as a introduction to Bayesian inference from a computational/understanding-first, and mathematics-second, point of view. Of course as an introductory book, we can only leave it at that: an introductory book. For the mathematically trained, they may cure the curiosity this text generates with other texts designed with mathematical analysis in mind. For the enthusiast with less mathematical-background, or one who is not interested in the mathematics but simply the practice of Bayesian methods, this text should be sufficient and entertaining.
The choice of PyMC as the probabilistic programming language is two-fold. As of this writing, there is currently no central resource for examples and explanations in the PyMC universe. The official documentation assumes prior knowledge of Bayesian inference and probabilistic programming. We hope this book encourages users at every level to look at PyMC. Secondly, with recent core developments and popularity of the scientific stack in Python, PyMC is likely to become a core component soon enough.
PyMC does have dependencies to run, namely NumPy and (optionally) SciPy. To not limit the user, the examples in this book will rely only on PyMC, NumPy, SciPy and Matplotlib only.
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Greed, fear and overconfidence at Forex market
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To understand the processes of financial markets, you need to understand a little bit of human psychology. In Forex, all the usual feelings and desires are expressed many times stronger. Natural feelings like anger, irritation, fear and hope, in the speedy pace of trading are often crucial for the trader.
The weak and the hungry, the slow and the self-confident - all these players will become victims of the trading game. Knowing your own weaknesses and shortcomings will help you to avoid bankruptcy, and if you can properly assess the psychology and behavior of other traders, you will be destined for success.
Greed
The dominating feeling that compels players to participate in currency trading market trading is the thirst for risk.
If you are too cautious in everyday life, then you can lose many opportunities to close profitable deals in exchange markets. So the best solution for you will be to choose another type of business, one that is more secure and less risky.
If you like taking chances, then most likely you will strive for greater trading volumes, exposing yourself to greater danger. We would recommend you go to a casino, as this will be much better (and cheaper) for you.
You should distinguish two types of motivations:
- rational, which is natural for the professional trader, and for the young trader before his first trades;
- irrational, a passion which every trader has, but some players seek to master their excitement, while others are too emotional and therefore doomed to failure.
Determining what motivates you during the trades is easy, if you pay attention to the following signals:
- you are seeking the opinion of others;
- you are talking about your opened positions;
- you are working without any plan established before entering the market.
All this shows that the trader is driven by passion, not by reason. The best cure for the excitement is making up a financial plan of activities, that is, the plan of deals.
Hope and Expectation
Hope for a profit is another factor driving a trader. Undoubtedly, the purpose of any work is to gain and maximize profits. However, if hope dominates over the calculation, there is a risk of overestimating your capabilities in analyzing the situation, so in your imagination, you can turn a real small income into a huge unobtainable profit. Hope must be submitted to a reasonable calculation. It is hope that leads novices to ruin.
Hope is crucial in two cases:
- at the moment of entry into the market. It is the hope of profit that compels a trader to commit a transaction in the financial market;
- at the time of loss, when there is hope for a change for the better.
There are three steps prior to hope emergence:
First, with minor losses hope is often justified and inevitable (if you are acting strictly according to plan and are confident of a favorable outcome).
The second phase begins when losses continue to occur. At this time, it is very hard for the trader to reasonably assess the situation and his possibilities. The best solution is to close the loss-making position or leave everything as is -- depending on how much the trader can control his desires.
The third stage take place when the losses are critical and hope has been replaced by despair (novice players are often very weak and desperate). Most traders are very familiar with the feeling of devastation, when it seems that the whole world had turned against them. The trader who managed to survive the last stage can call himself a successful Forex online trader. However, in his later career, the events of the third stage will accompany the player as fear.
Fear
Fear comes into play when a player makes losses. Some people are paralyzed by fear, they can not respond, and they go bankrupt. Others are forced to act by fear, and they make mutually exclusive deals, which makes them go bankrupt even faster.
In the critical period, the player needs to better improve the situation, rather than sit down and watch your dreams slowly disappear while quotes are changing. However, chaotic actions are no good, either. Acting reasonably and gradually is the way to work out of crisis. The player should not panic, and follow the plan made up before opening the positions.
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