Adapting to Volatile Trading Days – November 7 Day Trades

Whether you trade forex, stocks or stock index binary options, there was a lot of movement on November 7 to capitalize on. Just prior to the start of the US session the ECB Interest Rate announcement sent the EUR/USD flying lower, dropping about 150 pips in 2 minutes, it then consolidated for a few minutes before dropping about another 75 pips.

The consolidation presented a trade following the news announcement. The sideways movement and lack of any aggressive buying pressure indicated that this was indeed a consolidation, and that there was likely still another wave lower. Given the size the first drop, the drop after the consolidation was likely to be much smaller though.  Figure 1 shows the trade set-up.

Figure 1. EUR/USD 1-Minute Chart News Trade

Anytime there is a large price spike this approach can be used. There is a slight variation of this strategy specifically for the non-farm payroll report, but for most news releases or price spikes this strategy works well.

The strategy is only used when there is a sideways move following a strong price surge, as in Figure 1. In this case the consolidation took the form of a triangle. Since the initial drop was to the downside, watch for a break below the consolidation pattern, and when it occurs enter short.

The area to go short is marked with a checkmark just below the triangle. A stop is placed just above the recent high, producing 20 pips of risk in this example.

Use a 2:1 reward:risk ratio. Since the risk if 20 pips, the target is 40 pips from the entry price. Adjust slightly based on momentum as the price approaches your target, but your profit should be roughly two times or risk, or slightly more.

If the price surge was up, wait for the price to break above the consolidation and go long. Place a stop below a recent low and set your target at approximately two times your risk.

This was a profitable trade, the target marked with another checkmark.

The market then drifts sideways again, but this time breaks to the upside. There is no trade here since momentum has been overwhelmingly down and more confirmation is needed to go long against such a strong downtrend.

The price continues to rally setting up several long trades along the way throughout the European and US sessions. But with volatility having subsided a bit, the same strategy isn’t as effective; a new strategy needs to be implemented which takes advantage of the new conditions.

Based on strategy originally provided in Forex Day Trades  -October 7 (and covered more in-depth in subsequent posts), the next trade occurs when the price pulls back to the lower band following a strong run to the upside.

Figure 2. EUR/USD Trend Trade

The long trade is taken at the outer band with an initial 3.5 pip stop and a Fibonacci expansion tool is used to establish profit target. Given the now strong movement to the upside, the first target is the 61.8 Fibonacci level, resulting in a more than 25 pip profit. This is a larger than normal profit for this strategy when using a one minute chart.

As the price is approaching the target area though, the price is much choppier compared to the prior run higher. Near the target, the price is gyrating, barely pushing past the former highs. This is a sign the upward momentum may be out of gas so no long trade and we allow the price to make a deeper pullback.

The price does indeed experience a deeper pullback and toward the right of the chart the price continues to consolidate inside the recent low and below the recent high.

The next compelling trade is another long. The price rallies to the same high as before–short-term momentum has re-aligned with the major uptrend which is now in play–then experiences a shallow pullback to the lower band. Buy at the lower band with a 3.5 pip stop.

Figure 3. EUR/USD Trend Trade into Resistance

Since the moves are smaller than they were before the Fibonacci tool projects the first target just above the former high. If this exit is taken the profit is 8 pips–more than twice the risk. This is actually a reasonable target since it is possible there is some strong resistance given that that area rejected (sent it lower) the price only an hour before.

But the price does break through, and if you were patient, you could have taken profit at the next Fibonacci level, taking home a 15 pip profit.

More volatility ensued and more trends. A highly lucrative day for a trader who stayed focused. Yet trading in volatility can take a mental toll. Despite the opportunities, if you feel tired or mentally fatigued after trading days like these, don’t push yourself. Take a break, because without focus the losses can rack up just as quickly as the profits.