This week sees a fairly common scenario played out when there’s a Non-Farm Payroll (NFP) announcement at the end of the week. There was some price action on Monday (Sunday night for US) but price has been tightly range-bound for the remainder of the week. Forex strategies designed to follow trends obviously do not work in this climate – in fact, they often lose money badly! Have a look at an hourly chart of the EUR/USD for this week below:
Trend-following systems often work on the crossover of moving averages. Good systems look at the higher time frame as well as the current time frame. If the higher time frame trend is moving up, then we’d look for opportunities in the current time frame to get on an upward trend too. For instance, as the price moves in peaks and valleys on the current time frame, we’d try to enter just after we’ve seen a valley (trough).
This week, the higher time frame trend would have been seen as upward because it would have taken into account the big move up last week. If we’d tried to catch minor breaks on our current time frame in an upward direction, then we’d probably lose that trade because price didn’t really go anywhere!
There are several possible solutions to this problem:
- A good money management strategy would STOP us from trading if we’ve had a string of losses. For instance, if we’ve taken trades on Monday and Tuesday using our trend-following system and we’ve been stopped out for a loss each time – then our money management strategy should stop us from trading until price starts trending again. My personal strategy is to stop trading for the day if I’ve lost a specific percentage of my trading account in that day. This is a good time to sit back, evaluate what’s going on and get back into the market when ready.
- Price will normally consolidate after a big move, up or down. We saw a good move up in the EUR/USD of nearly 500 pips last week, so it’s not surprising to see some tight consolidation going on this week. If this becomes obvious in price action, then abandon your trend-following system until price breaks the range and begins trending again or starts a new trend. The end of this week sees the NFP announcement too, so price generally settles down considerably in the lead up to this.
- Beware of trend following systems that only give an ‘up trend’ or ‘down trend’ signal. A good trend following system will also have a ‘flat’ signal. In this case, it’s best to abandon your trend following system until a more appropriate time.
- If your trend following system is not working for any of the above reasons, then move to another more appropriate system – something that works in range-bound / consolidating / correction markets. I like to use a bollinger band system and enter off the bounces of the outer bands and take profits around the middle of the bands. I’ve had some decent success on the 15minute charts using this method this week.
In summary, don’t believe that a good forex trend following system is the answer to all your dreams. It’s a good tool to have in your trading toolkit but you need to be on the lookout for range-bound markets (such as consolidating after a big move or in the lead-up to a big news announcement like NFP). In range-bound markets, either DON’T trade, or use a more appropriate system, designed for those types of markets.
Remember, always Trade Seriously!