Forcing trades in quiet or illiquid markets, can lead to significant losses.

2nd March 2019 Off By binary


Sometimes it can be painful reading threads on trading forums, when you observe retail FX traders making basic errors, such as; aggressively executing trades, during times of the day when FX market activity and liquidity is significantly reduced. Typically, you’ll see USA based traders, dotted around the various time zones in America, taking trades in their late afternoon/early evening session, when London and European markets have closed.

They desperately try to take profit out of the FX market, when the market might not be tradable. They may be part time day traders who: come home from their day job, switch the router on, turn on the MacBook Pro, grab a beer from the fridge and get ready to trade. The problem with that scenario just outlined, is that the markets mightn’t actually be ready to trade, when they are.

The FX market isn’t a one armed bandit at Vegas that you can put money into and just spin the wheels, it can only pay out under certain conditions and circumstances. And statistically, you’re far less likely to hit the jackpot when the FX machine is clunky, tired and perhaps empty of opportunity. For the most part, direction of an FX security has already been set for the day by late evening-nighttime in the USA, unless any major calendar event is released (FOMC rate setting decision), or a major political development breaks, which then impacts on the FX market.

During times when activity and liquidity reduces in the FX market, the spreads increase, poor fills and slippage are more likely to occur and the FX markets are more likely to move in narrow ranges, offering very little scope to profit. Irrespective of the platform you choose to trade on, you can’t force trading opportunities, that don’t exist. Trading through an STP-ECN broker, into liquidity pools created by institutions, on MetaTrader4, isn’t a panacea for poor trading methods and bad habits.

If you need an example of when not to trade, take a look at the spreads on offer when FX markets creak into life on a Sunday evening. Some of the spreads on offer are eye watering, and reminiscent of spreads retail FX traders would pay before internet trading became mainstream. The markets might be open, but that doesn’t necessarily correspond to a market being tradable.

You can’t beat the market, you have to work with it. You can’t take out what isn’t there. If an FX security, during late evening trading, is moving in a (for example) ten pip range and has done so for an extended period during the late session, you have to question why you’re thinking of taking trades. What price action has developed, in order to encourage you to go long or short? Are you corrupting your trading plan, just to be involved, to feel busy and to justify your trading existence?

It’s important that traders identify the trading times when liquidity and activity fall dramatically and adjust their trading method and strategy accordingly. If not, then they could simply find themselves donating money to the markets, who will gladly accept the donations. Consider this; in a tightly ranging illiquid market, you could easily lose fifty pips in a few trades. Let’s surmise that you’re the eager manual day trader previously mentioned, who comes in from work pumped up and ready to trade. You’re trading EUR/USD and EUR/JPY, but the spread is no longer 0.5 pips, it’s widened to 2 pips. You take five losing trades, during the evening session, when you’re forcing trades.

You get a few bad fills, experience slippage and the spreads carry on widening. With very little movement, by simply being the wrong side of a ten pip range, if you take five trades, you could easily find yourself fifty pips down for the session. You’re also left frustrated, your personal psyche is effected, you might have indulged in some negative, revenge trading, as the market didn’t move in tandem with your choices.

This could have been avoided by identifying times when: liquidity is lower, activity has tailed off and FX markets are moving in tight ranges. The London and New York trading sessions are the principal times when FX trading activity is at its highest. It’s the period when institutional banks will be buying and selling currencies on behalf of their huge client base. When these banking individuals go home for the day, activity falls off, despite FX trading being a 24/5 business.

If you live in a country which doesn’t allow you to easily trade during times of peak market activity, then you have two choices. Firstly; consider trading off longer term time frames. Move up to swing or position trading, whereby you’ll check in with your trades, or on market conditions throughout the day. You won’t sit down to specifically trade a season.

Secondly; you could still operate as a day trader in the evening, you just have to be highly selective. Perhaps only trading when you know there’s a possibility for a high impact calendar event, to move the markets. For example; you might decide to trade when the FOMC rate setting announcement is made, and during the press conference the committee then holds.

A legendary phrase concerning trading might be worth considering, if you’re tempted to trade during illiquid periods. It’s attributed to the (partly fictional) life account of the infamous stocks trader Jesse Livermore, immortalised in the book Reminiscences Of A Stock Operator;

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market”.

Article by FXCC


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