I hope that you had a successful week of trading behind you. The market was very active on Monday but cooled down in the subsequent days.
The Forex market was on fire on Monday and some of the currencies, such as the EURJPY, made huge falls to the downside. Within just a few hours the EURJPY fell 650 pips. However, ever since the dramatic decline the currency has been going sideways.
The EURJPY is not the only one. The EURUSD, the USDJPY, the GBPUSD, and the GBPJPY all had similar big moves without any significant breakouts and follow through on Tuesday, Wednesday, Thursday and Friday morning.
Actually, the currencies made quite decent sized retracements were able to build decent sized consolidation zones.
So today we will switch gears and instead of focusing on current market events, this article will focus on impulsive and corrective moves as an attempt to explain the market behavior of this week.
It is not secret that the currency market has two distinctive patterns of movements:
1) Impulsive moves
2) Corrective moves
The impulsive moves are 1 directional. These moves are fast and they tend to reach their targets in a quick timely fashion. These moves rock and there is hardly anything stopping them. All support and resistance has vanished and the currency is moving endlessly in one direction.
The corrective moves have no clear direction. They bounce up and down, and down and up. There is no clear direction. In these areas we see the currency making flags, triangles, wedges, sideways consolidations, and many more corrective patterns. The net result is that the currency in fact hardly moves anywhere. It just oscillates back and forth.
According to statistics, currencies spend at least 70% of the time in corrective phases. Then again currencies only have an impulsive character at maximum 30% of the time. Forex trading is simple but not easy. That is why Winners Edge Trading is here with valuable Forex advice day in day out on how to trade Forex. This stat has important consequences.
Logically speaking this fact has huge implications for any trader’s Forex trading strategy or strategies. Usually speaking traders have Forex strategies that focus on either trend following setups (impulsive) or range bound setups (corrective). Some attempt to trade both but a high level of experience and great skill set is definitely required. Read here a great article how to check if your investment is backed by the right strategy. http://winnersedgetrading.com/is-your-investment-backed-by-the-right-strategy/
For most traders the best value for your money and your risk is catching impulsive moves. Why?
Impulsive moves have the following advantages:
– Impulsive moves reach their target quickly
– Impulsive moves have better great reward to risk
There multiple advantages of having your trade develop quickly:
– The trade can be moved to break even status quicker, allowing a trader to get back their margin. This in turn gives a trader the opportunity to take a new trade
– The trade will reach the target sooner, which lets the trading capital grow quicker
– Impulsive moves create less psychological stress with traders, because the trade is good to go and on its way. In some cases the trade could even be at the Break Even level and all risk off the board. Trades which are open and indecisive for lengthy periods of time create insecurity with many a trader.
Impulsive moves however are kind of rare. Not as a rare as a peril. But still, it is obvious that the currency likes to correct. Roughly speaking, in 3 out of 4 cases the Forex market is in such a corrective mode, so it is definitely a substantial period of time.
The trader’s goal is therefore to identify impulsive opportunities and judge the likelihood of an impulsive move actually unfolding. A Forex trading plan which incorporates this in their plan is worth Gold. That is the best answer anyone can give to the question how to trade the Forex market.
This is not an easy task and requires a keen and experience eye. However there are areas in which a currency has a higher likelihood of making an impulse.
Trading with trend for example increases those probabilities. This Forex strategy allows traders to focus on catching impulsive moves, as most of these moves occur in the same direction as the trend.
Of course there are definitely impulsive corrections, just as there are trending movements which are slow paced. I
f a trader is skillful enough to catch impulsive corrections, then that is added bonus. But until a trader is consistently profitable, sticking to impulsive trending mode trades is a wise idea. On average, corrections are by far less predictable than impulses.
When o when?
The big question is when will does impulsive moves actually start?
This is the most difficult question a trader can imagine. And the answer is not easy. However there are some guidelines that can be used for identifying areas of corrections and areas of impulses.
The irony is that most traders try to chase an ongoing impulse. While this in itself might provide good opportunities for the experienced traders, for many traders this proves to be fatal. Why?
Many traders are lured into the market when seeing an impulse. This in part can be explained by the psychological elements of fear and greed.
The trader sees action in the market and does not want to miss the boat with profit sailing away. Therefore the trader takes a leap of faith. Jumping into a rolling and ongoing move can however have adverse affects without sufficient preparations. In many cases the currencies retraces against the trader, just at the moment the trader decides to take a trade. How many of the readers recognize this phenomenon? Please write a comment in the section down below if you do.
Because corrections are long and impulses are short, the statistical probability that the impulse will continue once it is on its way is decreasing.
Once a correction has lasted a substantial period of time, the chances of an impulse occurring sometime soon are actually increasing.
This is almost opposite of seems natural to a trader. But the biggest reward can be achieved if a trader can catch the turnaround just before the impulsive move starts. There lies the biggest potential a trader can ever wish for. Use this knowledge wisely 🙂
Here is an example of the GBPUSD.
We hope that we have helped you with your quest on how to trade the Forex market.
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Have a great weekend!
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