When volatility is low, we need to be very clear about when we will day trade and when we won’t. 2019 has witnessed near historic lows in volatility for the EURUSD. That doesn’t mean the EURUSD can’t be day traded, it just means that we need to clearly define what types of days we will trade.
When Europe opens, it isn’t clear yet what type of day it will be. Trading the European session means waiting for some moves to happen before stepping in…and only if the price action looks suitable for your strategies. If trading in the US session, there is more information to go off of since the movements from the European morning can be analyzed.
Here are a few things I look for to see if day trading the EURUSD is worthwhile:
- Has there already been good trade setups earlier in the session? These are setups that would have produced a profit based on the strategies being used.
- Is there followthrough on price moves? Followthrough is the ability for the market to continue moving in a given direction for at least 3 or 4+ price swings/waves.
- Is the price action relatively clean? Does the price move in the trending direction, pullback, consolidate, and then move in the trending direction again? This is much easier to trade than if the price is making very complex pullbacks (lots of little waves), not consolidating, or has lots of false moves before moving in the trending direction again.
- After a trade trigger, is the price moving at least 1.5x my risk? For example, if I risk 5 pips by taking a trend trade on consolidation breakout (following a pullback) has the price been moving at least 7.5 pips in the trending direction after that? Basically, I want to look at the past price action and determine whether the price is moving enough to give me a favorable reward:risk.
The trade examples below show a day (April 8, 2019) where the EURUSD moved cleanly and provided great opportunities. At this particular time, the EURUSD was moving about 55 pips per day on average. In that sense, this was was a pretty typical day for a low volatility environment, as the EURUSD moved 53 pips from high to low during the European and Overlap period.
Chart times in GMT +3.
Once the European session gets going (in yellow), it takes about 90 minutes before an uptrend emerges. Moves prior to that are small and inconsequential. Once the uptrend starts, all the criteria mentioned above are met, EXCEPT for seeing Followthrough. About two hours and 45 minutes into the European session we could have started trading based on the criteria above, as by that point we have followthrough and the other criteria are still satisfied (this is a personal judgment call).
We know volatility is relatively low overall, so there is no reason to get greedy. Take profits at about 1.5x risk. If risking 5 pips, set a target for 7.5 pips, for example.
Throughout the European session, there is a nice uptrend which leads into a triangle pattern as we move into the US session and Overlap period (green). The triangle could have been traded based on the triangle breakout method or the chart pattern front-running strategy.
After the triangle breakout, the uptrend is still underway, and we are back to looking for pullbacks and consolidations.
Several trades occur. Even with a 1.5x reward:risk target, it was pretty tight as to whether all the targets would have been hit (depends on your spread and exact entry). Even if the exit was missed and a couple of trades ended up flat, it was still a decent day overall.
Set clear boundaries for when you will trade. During low volatility environments, be conservative with the reward:risk, and be patient with letting price action unfold. Once a trade setup occurs, be quick to get in though, because late/poor entries may mean the target isn’t reached.
By Cory Mitchell, CMT
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