Decreased Volatility Breakout (Part I)
Without understanding the crowd psychology, you cannot become a successful trader. Always try to understand the crowd psychology. Trading breakouts is one of the most popular ways of making pips from the forex market. Decreased volatility breakout is one of the subsets of breakout trading. While this strategy is similar to the strategy of trading breakouts, but it is specific to a certain conditions in the forex market. With this strategy, you try to take advantage of periods of low volatility in the forex market.
Volatility tends to be high when prices change to a large extent within a short span of time. Volatility is a measure of the scale of price fluctuations over time. The reverse also holds when prices oscillate more or less close to a certain price level without deviating much from it over a long span of time, the volatility tends to be low during such periods.
Entering the forex market in periods of high volatility can be stressful for most of the traders as they dont know whether the trade will go their way or not. However, it is the periods of high volatility that lets traders make pips and it is the volatile nature of the forex market that attracts the risk seekers in search of high returns. Have you ever thought; why not concentrate on the low volatility period instead of focusing on the high volatility market.
There is a tendency in the currency prices to alternate between periods of high volatility and low volatility in the forex market just like other financial markets. This recurrent pattern is due to the crowd psychology which is the force behind changes in the forex market. Forex market is just people trying to buy or sell currencies. It is the psychology of the crowd that rules the market in the end.
You must understand how trend is developed in the currency market and how the crowd psychology affects the different phases of the trend. There are four main stages of a trend and there is a different crowd psychology behind each stage of the trend. These four stages are: 1) Nascent Trend, 2) Fully Charged Trend, 3) Aging Trend and 4) End of Trend. These four stages are closely linked to the cycle of volatility in the market. Lets discuss these stages of a trend in detail.
Nascent Trend: This is the first stage of the trend. In the beginning of the trend when the new trend just starts either upside or downside, most market players are still skeptical about the possible new trend direction during the nascent stage of the trend. Volatility is thus low as both bears and bulls tread carefully and are cautious. Nothing is clear at this stage of the trend. Market players are trying to confirm or deny the start of a new trend. So everyone is cautious.
Second Stage-Fully Charged Trend: The trend is in full progress and it is time for more action now. During this stage the trend becomes well established. The trend becomes fully charged as there is now evidence from fundamental data that supports the trend direction. When the new information proves them wrong, traders who are caught on the opposite side of the market become exposed. They become desperate to get out of the wrong side of the market.
A lot of changing positions will take place during this period. Traders who were initially on the wrong side of the market become new converts to the trend. This causes the currency prices to move more dramatically within that stage.
Everyone wants to jump in the trend. More and more positions are established. Traders become convinced of the direction of the trend and new information convinces most of the traders of the direction of the trend. Hence volatility tends to be high during this period. This brings prices to higher highs in an uptrend or lower lows in a down trend. Always remember, Trend is your friend. Ride the trend as long as it lasts. - 23222
Volatility tends to be high when prices change to a large extent within a short span of time. Volatility is a measure of the scale of price fluctuations over time. The reverse also holds when prices oscillate more or less close to a certain price level without deviating much from it over a long span of time, the volatility tends to be low during such periods.
Entering the forex market in periods of high volatility can be stressful for most of the traders as they dont know whether the trade will go their way or not. However, it is the periods of high volatility that lets traders make pips and it is the volatile nature of the forex market that attracts the risk seekers in search of high returns. Have you ever thought; why not concentrate on the low volatility period instead of focusing on the high volatility market.
There is a tendency in the currency prices to alternate between periods of high volatility and low volatility in the forex market just like other financial markets. This recurrent pattern is due to the crowd psychology which is the force behind changes in the forex market. Forex market is just people trying to buy or sell currencies. It is the psychology of the crowd that rules the market in the end.
You must understand how trend is developed in the currency market and how the crowd psychology affects the different phases of the trend. There are four main stages of a trend and there is a different crowd psychology behind each stage of the trend. These four stages are: 1) Nascent Trend, 2) Fully Charged Trend, 3) Aging Trend and 4) End of Trend. These four stages are closely linked to the cycle of volatility in the market. Lets discuss these stages of a trend in detail.
Nascent Trend: This is the first stage of the trend. In the beginning of the trend when the new trend just starts either upside or downside, most market players are still skeptical about the possible new trend direction during the nascent stage of the trend. Volatility is thus low as both bears and bulls tread carefully and are cautious. Nothing is clear at this stage of the trend. Market players are trying to confirm or deny the start of a new trend. So everyone is cautious.
Second Stage-Fully Charged Trend: The trend is in full progress and it is time for more action now. During this stage the trend becomes well established. The trend becomes fully charged as there is now evidence from fundamental data that supports the trend direction. When the new information proves them wrong, traders who are caught on the opposite side of the market become exposed. They become desperate to get out of the wrong side of the market.
A lot of changing positions will take place during this period. Traders who were initially on the wrong side of the market become new converts to the trend. This causes the currency prices to move more dramatically within that stage.
Everyone wants to jump in the trend. More and more positions are established. Traders become convinced of the direction of the trend and new information convinces most of the traders of the direction of the trend. Hence volatility tends to be high during this period. This brings prices to higher highs in an uptrend or lower lows in a down trend. Always remember, Trend is your friend. Ride the trend as long as it lasts. - 23222
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Know These Forex Charts. Learn Forex Trading!
posted by X - Men @ 4:22 AM
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