This week’s question comes from Majid, who asks:
How should we trade the Forex market in the summer when things slow down?
There’s no denying that trading activity slows between the months of June and August. Many traders use this time to go on vacation, which causes volume to dry up.
When market volume is low, markets tend to become choppy, making trading that much more difficult.
You see, there is a correlation between volume and the reliability of the price action on your charts. That’s why the daily time frame is so effective. It packs more volume per candlestick than the intraday charts.
It’s also no coincidence that the Forex market is one of the best for technical traders and is also the most liquid financial market in the world.
The good news is that there are a few simple things you can do during these slower months to stay profitable and avoid unnecessary losses.
In this post, we’ll discuss three simple methods to keep your capital safe during the summer slowdown.
One of the easiest ways to cope with a slowdown in market activity is to reduce your trading frequency. So instead of trading two or three times per week, you may have to scale back to just one.
This is one of the first things I do when June rolls around. The only exception is if market conditions remain favorable throughout the summer months, which is rarely the case.
As an example, I typically look for four to ten setups each month. So when summer kicks off and volume dries up, I usually scale that back to two to six setups each month.
That’s still more than enough for me to make a considerable amount of money during the summer.
Of course, that’s just a hypothetical. My actual activity depends on how favorable (or unfavorable) market conditions are at the time.
Usually, when I mention a range of two to six setups per month, the initial reaction is that it’s far too low. I mean, how do I expect to make decent money if I take just two setups in a month?
Keep in mind though that my minimum risk to reward to even consider a position is 3R. That means the profit potential must be at least three times the risk.
For trades where the expected duration is longer than one week, my minimum is 5R.
This means that one profitable trade hitting its intended target is worth anywhere from 3R to 5R. Even if I’m risking just 1% of my account balance, that’s 3% to 5% profit.
I could even lose on over half of my positions and I’d still be okay.
Also, by reducing my trading frequency when conditions are unfavorable, I’m taking care to avoid giving back any profit made up to that point.
Above all else, I always advocate using the daily time frame. It’s far more reliable than something like the 1-hour time frame, yet still offers plenty of opportunities throughout the month.
However, I also trade and teach strategies on the 4-hour time frame. It too can offer highly reliable signals if you know what to look for.
Despite this, even the 4-hour charts can become a risky playing field between June and August.
During this time volume dries up, which translates to choppier price action and a lot of indecision. That puts you at a higher risk of falling victim to false breaks.
In many ways, the daily charts are six times more reliable than the 4-hour time frame. After all, a full daily session is made up of six 4-hour periods.
That can mean four to six times the volume depending on which session you’re viewing (Tokyo, London, New York, etc.).
It also gives you the advantage of seeing what happens at the New York close before making a decision. That alone is enough of a reason to stick to the daily chart.
I’m a big fan of the daily time frame at any time, but it’s particularly useful during those summer months when things slow down for us traders.
You may not know this, but I don’t always wait for a pin bar or engulfing candlestick to form before taking a trade.
However, during times when volume is light, I avoid this type of entry.
Instead, I almost always wait for confirming price action before considering an entry. It gives me that extra layer of confidence in the setup, which is critical in low liquidity environments.
So what signals do I wait for exactly?
As mentioned above, I favor the pin bar and engulfing bar. I’ve found these two signals to be more reliable than just about any other candlestick pattern out there.
The key to being able to profit from them lies in the level at which they form. That is true regardless of whether or not market volume is lighter than usual.
These are just a few simple ways to help you get through the slow summer months as a Forex trader. One of the worst things you can do is give back all your profits just because volume has dried up.
Always remember that, from a technical perspective, the volume is what dictates whether or not a market will be reliable. It’s the reason the currency market is one of the most, if not the most reliable market in the world for technical traders.
With this in mind, it’s usually a good idea to reduce your trading frequency between June and August. This gives you a much greater chance of keeping any profit you made during the first half of the year.
It’s also a good idea to abandon the intraday charts when volume dries up. The liquidity in one daily candlestick is much greater than any lower time frame. In fact, it’s four to six times greater than a 4-hour candlestick depending on the session you’re trading.
However, keep in mind that even the daily time frame can become unreliable during the summer. For this reason, I like to wait for confirming price action such as a pin bar or engulfing pattern before taking a trade.
Combine this approach with using the daily time frame and a reduced trading frequency, and you’ll have an edge regardless of market conditions.
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