Trading “Tough” Days – Pay Attention to Tendency and Price Action

Not every day is going to be easy to trade–some days are, some days aren’t. Depending on trading style, a tough day for one trader may be a glorious for another, but the fact remains every trader faces tough market conditions.

Since I don’t start trading the EUR/USD until well into the European session, nearer to the US open, I can already see what the day is like. If it appears to be tough conditions for the strategies I use–which are typically trend following strategies–I’ll either stay away or will be very patient with entries and exits.

On November 5 the EUR/USD showed a tendency to move sharply and then consolidate in complex formations, then move sharply, and so on. By realizing the tendency of the day, and being patient for opportunities, even a trending strategy could be employed. Patience is key though, because getting impatient and expecting a big move while complex consolidations are occurring can mean a lot of false signals and thus losing trades.

Picking out Tendency

Each day has a slightly different tendency. Some days we see sharp moves, followed by sharp pullbacks, or slow choppy trends followed by sharp or slow pullbacks, or no real trends at all.

By paying close attention to how the market is moving overall, we are better able to pick the times when our strategy should be applied.

Figure 1 shows some of the European session (bright yellow) and the start of the US session (pale yellow), and highlights this overall tendency.

Figure 1. EUR/USD 1 Minute Chart

Looking closely there are several additional tendencies which pop out, aside from the sharp moves followed by a complex consolidation.

Each of the consolidations has multiple false breaks out before the eventual move. The overall trend is down, so we want to be especially cautious about upside breakouts, because on this time frame, those breaks higher are likely to be false.

The next tendency is that in the small price swings just before the break lower, the price starts making lower highs, indicating a buildup in selling pressure.

The following chart highlights how these tendencies could be used to pick a high probability trade.

Figure 2. Short Trade Based on Tendencies

While the tendency of the day is used to help isolate entry and exit points, we can’t abandon other methods for determining strength.

Incorporate Price Action Analysis

Following the first consolidation the drop is very steep and long. After the second consolidation, the drop is steep, but is much shorter than the last drop. This indicates the trend is still down, but that it is weakening. We still watch to see if the market follows the same tendency, but is now possible that a break higher could also occur.

Figure 3 shows the third consolidation and the break higher that followed it.

Figure 3. Same Tendency, Opposite Direction

This consolidation has similar tendencies to the prior ones, except in the opposite direction. On the third consolidation there is a break lower followed by higher lows–the opposite of the other consolidations. Combined with the possibility of a reversal based on the weakening downtrend, we want to look for a long position.

The EUR/USD makes a new high and once again a new low which is the area we want to enter long (marked on chart). As per the daily tendency a very sharp move ensues and we look for an exit as soon as the price starts to consolidate.

A forth consolidation is also marked, but at no point do we get the higher lows which should occur in order for us to take a long trade. This consolidation did not align with the tendency of the day.

Final Word

On a day when many traders could have easily lost money trading within the consolidation, and completely missing the big moves because they were frustrated with the choppy price action, by paying attention to daily tendency and overall price action you could have grabbed two profitable trades and stayed out of the losers–not bad a for a tough day. It is important to stick to the strategies you have laid out for yourself, but it’s also important to pay attention to the price action and tendencies of the day so you can pick which times are best to employ that strategy.