What To Do In A Choppy Market

Some of the biggest obstacles in trading have to do with over trading and attempting to trade a choppy market. There are some traders who want to place five trades a day in the currency markets and expect to nail 100+ pip moves on each and every trade. Most of those traders expectations are just out of sync with the order flow, liquidity and volatility of the market.

Yes, the market does trend nicely at times. And you should take advantage of the trends whenever you can. But eventually the market gets into choppy or rangy market conditions. And you need to evolve or you will suffer big trading losses.

What To Do In Choppy Markets

If you are faced with trading a choppy or very range bound market, what do you do?

There are four things you can do:

1. Learn to trade the choppy markets, using techniques such as stop hunting, option barriers, one day sentiment/macro shifts, and fading the breakouts.

2. Stay out of the market and wait until the chances of a breakout are higher, or the breakout has already happened.

3. Go find another market that is trending. Find another market that is setting up for a nice explosion of volatility. If you strictly trade currencies then it is difficult as there are times when all the currency pairs are choppy. In such cases it may be wise to branch out into other markets such as stocks, futures, etc. Paul Tudor Jones keeps a note on his desk which says “Find A Trending Market”

4. Learn some sort of option spread strategies and plays to make money during expected low volatility environments. As Ray Dalio said there is no such thing as a bad market environment.

For the retail forex speculator there aren’t many viable option for option strategies in the forex market. There are some retail forex option brokers, but I have not tried them. Since they are not traded on an exchange, you can pay much more than you normally would for the options.

Large Market Participants Use Exotic Forex Options

Big banks and hedge funds in the forex market like to use exotic forex options for this. Typically a Double No Touch Option.

There was recently a Double No Touch option in the EUR/USD which was taken out at 1.45. Some market participants wanted to play the low volatility in EUR/USD by buying some Double No Touch Options with barrier prices at 1.40 and 1.45. If EUR/USD did not touch both 1.40 and 1.45 by the time the option expires, then the market participants make their payout. If it didn’t then they lose their option premium they payed.

However, the option hunters came and the stops above it were tripped and knocked out the barrier. There was a nice shorting opportunity.