Monday, November 22, 2010

Forex Market Conditions - How Can You Tell When Market Conditions Change?

You will often hear people in the forex trading community talking about market conditions, so in this article I want to discuss what people actually mean when they use the term 'market conditions' and how they can effect your overall trading strategy.

In it's simplest terms market conditions often refers to the volatility of a particular currency pair. So if a pair is trading in a daily range of around 100 points on average, and suddenly starts trading in a range of 200 points every day, then you can clearly see that market conditions have changed for this pair.

So to get an idea of the latest market conditions for any given pair you can simply open up a daily chart and take a look at the Average True Range (ATR) indicator. If you look at the latest reading and compare it to previous months and years you will soon get an idea of how volatile the markets are at the moment.

This information is important because some systems and robots work better in highly volatile conditions, whilst others are geared up to trade price reversals in narrow ranges, for example. So it really is worth paying attention to this indicator to see when conditions are in your favour.

When talking about forex market conditions, people will also refer to the latest characteristics of a particular pair. For example a pair may be in a long period of consolidation (like the USD/JPY at the moment - trading in a tight range between 80 and 82), so it would be referred to as a ranging pair, or a pair could be in a strong upward or downward trend, in which case it would be referred to as a trending pair.

So the point is that when people talk about market conditions in the forex industry, it can mean different things to different people. Traders with a finance degree may coin the term differently than those with no formal education in trading. However for me it is all about volatility, and this is best determined by looking at the ATR indicator.

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