We study the market conditions in order to select the optimal trading strategy
Buying a maximum is unlikely to succeed if the volatility of market quotes goes off the scale and the trend is at the last stage of its life cycle. Similarly, it makes no sense to enter the medium-term position in the middle of the consolidation range in conditions of low volatility. Any strategy should be applied depending on market conditions. In order to describe it usually use fundamental analysis tools. However, the technical one can provide the trader with a lot of useful information.
The key indicators to determine the current state of the market are volatility and trend strength. The first is the volatility of the currency pair quotes and can be measured using an indicator of the average true range of the ATR. Its increase indicates an increase in volatility and vice versa. In order to understand what the volatility of quotes on the market is now, low or high, you need to compare the current indicator readings with history. To determine the strength and, importantly, the direction of movement of a currency pair, an indicator of the average directional movement is used. It is believed that its values above 25 indicate a strong trend, below 25 – about consolidation.Peak values of the indicator can serve as reversal signals. If its component + DMI is greater than –DMI, bulls dominate the market and vice versa. Thus, using technical indicators, you can determine the market situation no worse than with the help of fundamental analysis tools. Another thing is how to use the information received.
In conditions of low volatility and a strong trend, the best strategy is to buy highs or sell lows (“tactics of turtles”). The principle of ” buy expensive, sell even more expensive ” is more relevant than ever. In the case of the Australian dollar ADX> 25, the volatility of quotes is low, “bears” dominate the market, the probability of kickbacks is low. Entering short positions makes sense at breaking the September bottom.
A strong steady trend and growing volatility are best suited for trading on pullbacks. The t- raider needs to identify the point of depletion of the corrective movement and enter the position in the direction of the current trend . For this, moving averages, diagonal or vertical levels of resistance-support, other technical analysis tools are suitable. On the daily chart GBP / CHF ADX> 25, volatility is growing. The only thing that bothers is the excessively high value of the indicator of average directional movement. If this is the case, it will continue to go, then the turn is not far.
A market where volatility is low and the trend is weak, at first glance, causes boredom. In fact, the cyclical nature of the movement of quotes of a currency pair on Forex suggests that consolidation will end sooner or later and give way to a new trend . You just need to be able to wait and get ready to act taking into account the breakdown strategies available in the arsenal. So in the case of EUR / USD ADX
Finally, the fourth situation, in which volatility rises and is above its previous values, and the trend is weak, is best suited for intraday strategies with narrow targets. Traders have not decided on the direction of further movement of AUD / NZD, which allows you to make transactions using scalping.
Thus, the combination of ADX and ATR indicators allows you to quickly select the instrument that is suitable for your trading style.