Some say that volatility is a forex trader’s best friend. But how do you make profits on a low-volatility trading day?
Now that most of the major central banks have laid out their monetary policy biases and forex traders have pretty much priced them in, I won’t be surprised if trading volatility settles down over the next couple of weeks.
So how can you make pips in this trading environment?
Here are a few suggestions on how to gain profits even when there are no new catalysts for big moves.
1. Look at currency correlations for possible trade opportunities
A lack of central bank announcements or tier 1 economic reports doesn’t necessarily mean a low-volatile trading week for the major currencies. One of the advantages of currency trading is that it’s not just dependent on central banks and economic data for some action.
All transactions that involve money can affect the supply and demand of a currency. You can look at gold, oil, and dairy prices for possible trades on the Australian, Canadian and New Zealand dollars.
Movements of government bonds, equities, and even big mergers and acquisitions (M&A) flows can also influence the price of the major currencies.
Of course, you can’t just buy the dollar because the weather in your brother’s cousin’s neighborhood is remarkably bad. You also have to make sure that other traders are seeing the same correlations you’re seeing!
2. Try making carry trades
As mentioned in the School of Pipsology, carry trades simply take advantage of interest rate differentials.
If prices generally stay the same, you can earn money by buying currencies with higher interest rates against ones that have lower rates. Currency crosses and exotic pairs usually present the biggest carry trade opportunities.
Just make sure you pay attention to your broker’s spreads, as they can be punishing when there’s not enough volatility to go around.
3. Find strategies for a low volatility environment
Though trend-trading and similar volatility-based strategies are forex trader favorites, you could also take advantage of low-volatility approaches to take home some pips.
You might want to try strategies that focus on ranges, bigger position sizes, tighter stops, oscillators, or even trade lower time frames. Feel free to get creative with your pip-making strategies!
4. Look out for new game changers
Just because there’s no catalyst today doesn’t mean there won’t be any market-moving report tomorrow. Look at economic reports collectively and see if there are any changes that might alter a central bank’s policy bias. Listen to central banker speeches for any hints of policy changes in the near future.
Scan your news feeds and keep up with the forex grapevine for any issues or tidbits that might look like the next market-mover for the major currencies.
Last but definitely not the least, you can also pay attention to overall risk sentiment for possible trade opportunities. Just make sure you stay flexible enough to weather any extra volatility!
Consistently profitable traders are not one-trick ponies. They learn to adapt to different trading environments and somehow make pips even when there’s limited trading volatility.
This doesn’t mean that you should force trades even when there are no big moves to take advantage of. This just means that, if you want to be consistently profitable, then you have to start developing and practicing strategies that can keep you in the game on low-volatility trading days.
