I get asked all of the time what the secret is to making money trading. The answer is simple, though not something people typically want to hear. If I had to pick one thing to teach new traders, I would say this: “Markets ebb and flow, but you need range, volume, and volatility to make money. The secret to success is that you have to stick around for those periods.”
When it comes to Forex, there isn’t really a true volume measure, but we can look at daily ranges to understand whether people are trading. We look for certain averages. When those averages occur, then things are good. It’s easier to make money, for example, when the GBPUSD moves 180 pips in a night than when it moves only 110. At 110 pips, by the time you spot a setup, a support or resistance point, and an entry, once that triggers, you don’t really move far enough to make good things happen. The reality is, you don’t make money in Forex trading for 20 pips. You have to look for something bigger, and that requires range.
Last June and July were great for ranges. Last October (late in the month) and November were great for ranges. In those months where ranges are good, you need to make good money, because the reality is that in average months, you’ll tread just above water, and in poor months, if you miss just a few trades that end up being the big winners for the month, you’re in trouble.
This is why we push so hard on the 6-month average daily ranges that we calculate. It’s important to understand that if the GBPUSD’s six month average daily range is 160, then that means that over the last six months, it’s traded above and below that level, but that your expectation can be around 160 pips. If that runs up to 200 pips, then the GBPUSD ranges have expanded wildly, almost to the point of being too crazy on some days. On the other hand, if it drops to 130 or 140 pips, you’ve got trouble because the market isn’t moving. That probably means that you have days where the GBPUSD is trading under 100 pips of range. No matter what anyone wants to believe, there is no success in a 100 pip range, especially if it ends up meaning 100 pips per day and 200 pips per week. That means you aren’t moving in one direction either.
But you can’t expect markets to be exciting all of the time. Granted, the drop-off that we have seen in Forex the last two months is pretty bad. I haven’t seen it like this since 2006. But there will be more exciting times ahead. Just remember, you make your money in those more volatile times, and you hopefully have a system that treads water or doesn’t crush you when everyone takes a break.