Understanding A Choppy Market & How To Approach It
In a choppy market, the prices hardly move upwards or downwards. Rather, they keep moving back and forth, something that can happen at any time in any financial market.
A choppy market may surface when the market participants are waiting for a catalyst, or when the buyers or sellers hang in balance, or when the price is fluctuating too much as a result of different reactions and points of view over a piece of news. Visit multibankfx.com
Understanding a choppy market
A choppy market will take place when both buyers, as well as sellers, find themselves in balance. It may even happen that they’re engaging in some solid competition but there’s no clear winner. Prices keep going high and low—either at a slow pace or too quickly and in big moves or small moves—but the price doesn’t seem to get any higher or lower on the whole.
Choppy conditions are generally linked to price ranges but they may as well happen in between trends. An uptrend refers to a series of higher swing highs and higher swing lows. When there is a choppy uptrend, it may violate lows, resulting in making a lower swing low only to move to a higher swing higher.
The price finally increases, however, the lower low may end up leaving many traders confused who end up entering into a losing trade decision because of it. In case this becomes a recurrent thing, the price could move in a single direction but the big moves in the opposite direction could make the traders claim that the market is choppy.
Causes of a choppy Forex market
The forex market turns choppy when the two currencies in a forex pair are weak or string simultaneously. This leads to a static pull of sorts between the market movements going up and down. Another reason where this could happen is when neither of the two currencies moves and both begin to consolidate. In case the market is filled with many choppy pairs or groups of pairs across many currencies at the same time, it may make the market come to a halt and move sideways.
Sometimes the market could turn choppy and move sideways for a day or two before a piece of key news is about to be announced. For example, in the case of the USD, if one is expecting some major news in the next two days, the market may stall and begin to move sideways ahead of the news as it awaits the outcome.
The USD has the largest trading volume and is the most liquid currency which works as a bellwether for the forex market sometimes. If there is some key news likely in the case of other currencies, the forex pairs that have those currencies may move sideways and turn choppy.
How to identify a choppy market?
The Average Directional Index (ADX) can be considered a decent technical indicator to tell whether the market is choppy or not. The ADX indicator can be helpful in recognizing the price trend prevalent in the market while also revealing its strength.
The key feature of a choppy market is the almost negligible presence of a trend and this is where we can put to use the ADX indicator so we know how strong the market trend is. If the trend is absent, we could deduce that the market is choppy and make trade decisions accordingly. The ADX operates with the help of the positive (+DI) and negative (-DI) direction indicators using which traders could decide if they want to go long or short on the basis of the strength and market direction. Whenever ADX moves above 25, it indicates that the trend is strong. When the ADX falls below 20, you can tell that the market is choppy as there is no trend.
How do choppy markets start?
When the market generally keeps trending across several pairs on the hourly, daily, or weekly time periods, we can in general say that the market is moving on an everyday basis. When there is a huge group of pairs that begin to consolidate marking the end of a trend, a choppy period could start.
With ending trends, markets begin to move sideways on a big group of pairs, leading to choppiness in the said pairs or groups of pairs. Consolidation periods are daily normal and a part of the typical market moves when the market halts for a bit so the pairs can establish their next course.
Indicator of an ending choppy market
When the entire market seems choppy, there is no ongoing trend or if the market moves sideways, you will eventually learn that the market is on the move again. If the market doesn’t trend, these signals could indicate that the market could move anytime now and thus traders can plan their moves accordingly.
Approaching a choppy market
Once a trader recognizes that the forex market is choppy at present, they can approach it in numerous ways. They may choose to not trade all together or consider trading smaller lots in each trade. For instance, if typically a trader trades five mini lots in every trade, they may bring down the number to one or two lots unless the market shows any signs of recovery. The idea is to be patient until the choppiness is gone. When you begin to trade in a choppy forex market, you could choose to scale out lots easily or consider coming out of trades and opt for an intraday trading style.
In this article, we took you through a number of ways in which you can identify a choppy forex market open. We explored different time frame analysis, how you can trade in a choppy forex market, and the ways in which you could keep track of your trades in a choppy forex market once the pairs begin to trend. If you realize that the market is choppy at present, you will have to put in a lot of work to keep track of the market in anticipation of the next round of breakouts and trends.