What Happens When the Market Changes?
It doesn’t matter whether you have been trading for several weeks, months or years. At some stage you must have noticed your trading strategy or Expert Adviser (EA) stopped working and all you see are your trades being gunned down by the market.
Any attempt to recover is likely to fail and if you were lured by the hefty leverage your forex broker is providing you in order to regain your lost capital from the market probably resulted in a margin call or greater losses, leaving you to mourn the lost capital.
The financial markets and not just the Foreign Exchange market are constantly changing. The changes are triggered by outside market events that have a significant impact that mutates the technical end of the market and some times even the currency correlations.
The most popular event was the Quantitative Easing (QE) operations that were conducted by the Fed several years ago, led by Ben Bernanke, the chairman of the US central bank at the time. A more recent event which we believe is more relevant is the People’s Bank of China (PBOC) intervention in the Forex market.
Due to the economic slowdown China’s central bank has devalued the Yuan (CNY) against the US Dollar in order to boost the export sector. Many central banks including the Fed we discussed earlier, the Bank of Japan (BOJ), the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) have taken measures to weaken their local currency to boost the country’s economy.
Market traders are labeling this as ‘currency war’ as each central bank is ‘battling’ with the Forex market to devalue its local currency.
The PBOC Impact on Forex Strategies
Based on our market experience we suspect many technical traders (not all of course) and forex signals providers experienced distortions in their trading strategies. If the trader continued to trade with the same strategy without any modifications we are convinced no improvement was noted.
EA’s in the MetaTrader4 (MT4) or any form of automated trading had to be adjusted to the new market conditions or temporarily suspended. If the EA developer failed to tweak the strategy the EA was based on it wouldn’t surprise if numerous EA’s spiraled out of control.
How to Know When the Market Changes?
It is rather difficult to constantly monitor the markets for traders that have a full or part time jobs or any other commitments such as children. These are following techniques you may use to know when the market conditions may have changed.
When you are next tot the computer open the economic calendar for the day and make notes of the key events and the time they were released. Open the forex charts in your trading platform, choose a 60min time frame.
If for example there was an important data for the UK at 08:30am GMT do observe GBP reaction to the news. If you notice a sharp price movement during a time no economic data was released this is your first indication something is happening.
You must determine whether the ‘mysterious’ news were limited to one currency (like CHF for example) or it has affected multiple currencies in the market. The more currencies that were affected the greater the chance your trading strategy could be affected as well.
The next step is to determine what the news were by searching online, which is not always an easy task. We at ddmarkets strive to notify all our traders with key events as we have done with the PBOC Yuan devaluation.
If you are an experienced trader that is familiar with fundamental analysis you should have no difficulties understanding how to trade and adjust yourself to the news that were released.
Solution for New Forex Traders
If you are a new forex trader and not sure how to handle or locate the news that affected the market our suggestion to you would be to use the 15min chart and study the currency pairs that were affected after the mysterious news were released.
If you notice large shadows in the Japanese candlesticks or that the vigorous reaction has resumed throughout the day it may be a strong indication the market has changed for the time being.
As we are very transparent we openly informed our traders in the past that we have temporarily suspended the trade alerts as the market was not inline with our trading strategy (see our trades performance).
The most notable times were when Greece began to have a major impact on the market and in January 2015 where we only issued a single trade alert (signal) in EURCHF, which produced over +300 pips. If you are unable to stop trading following when you realize the market may have changed halving your trades may be the best option.
By cutting you trades in half for several days you are protecting yourself from incurring hefty losses. If the new market conditions had a negative impact on your trading strategy your losses would be halved as you are trading with smaller trades.
If you notice there is no impact on your trading strategy, which is great news of course you may slowly increase your trade sizes as a precaution until they are back to the original size that is inline with your risk management. This is probably one of the safest approaches to the market when your technical analysis stops working.
Solution for Experienced Forex Traders
The other approach, which is what we often do at ddmarkets is to master multiple trading strategies that are very different from one another. When you recognize the market conditions you were accustomed to have changed you simply switch to another strategy.
Knowing which strategies to use when the market changes requires experience as the testing can only be made under new market conditions. Our forex trading strategy has been tested for more than 5 years under different trading conditions.
Testing trading strategies require time and patience and should not be rushed. If after the strategy was switched the market conditions are still not favouring your trading technique the best solution is not trade until the market stabilizes (often referred to as ‘sitting on the fence’) or cut your trades in half if you are unable to do so.
We hope this trading guide helped you discover how know when the market has changed. There are other methods that can be used but what we have provided is the simplest technique and most effective.
Last Updated on February 10, 2021