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Is it advisable to trade very volatile trends based on price action analysis?

Is it advisable to trade very volatile trends based on price action analysis?
Asked by
Dennis Mayer time-icon1 month ago
1 Answer Answer Question

Steve Walters
Answered time-icon1 month ago

The short answer to this question is that it is never advisable to trade extremely volatile trends unless you are an expert trader who is very familiar with the instrument you are trading.

With that in mind, here is a look at the types of trends you should trade and the volatile trends you should avoid. As a beginner or intermediate trader, keep in mind that the best trade setups are those that are aligned with the overall trend as opposed to counter-trend trades.


Trading trending markets

As a beginner, you should first learn how to trade trending markets that are not volatile as this will build your confidence as a trader.

Chart 1: CAD/JPY 1-hour chart with the price a stable trend

The above chart shows a perfect example of a trending market on the CAD/JPY 1-hour chart in early September 2019. This chart is easy for beginners to trade because they only need to choose the best locations at which to enter into a long trade to capitalise on the strong uptrend in place.


Breaking down the chart

The best time to take a long trade on the CAD/JPY chart would have been toward the bottom of the chart when price broke out in a strong uptrend as marked by the first green arrow. Entering into a long trade at this position would have provided the highest profit potential. However, it would have been an aggressive trade as the price could have easily reversed and headed lower.

Chart 2: The best entry on the CAD/JPY 1-hour chart

The chart above shows the best position at which a trader could have entered into a long trade on the CAD/JPY 1-hour chart to capture the most profit as the uptrend got underway.

What if you missed this great entry? Does that mean you have to sit on the sidelines and wait for the uptrend to end, or could you still get into the trend and bag some profits before the move was exhausted?

Chart 3: The second-best entry on the CAD/JPY 1-hour chart

The chart above shows the second-best entry that you could use to get into the trend on the CAD/JPY 1-hour chart and make some profits. However, this would have been the last chance for you to get into this trade as the move had been going for a while, and there was a high likelihood that it could end at any moment. Any other entries above this level would pose a significant risk with very minimal profit potential.


Why you should avoid highly volatile (choppy) trends

Chart 4: A highly volatile GBP/USD daily price chart

The main reason you should not trade highly volatile trends unless you are an experienced trader is that price tends to whipsaw past prior support and resistance levels and does not respect such levels.

It is almost impossible to trade volatile trends because price could quickly reverse and hit your stop-loss order before heading in your chosen direction, leaving you with a losing trade. You will also encounter problems when looking for a strategic location to place your stop-loss order because the price typically does not respect prior support/resistance levels.


What if you still want to trade volatile trends?

If you still want to trade volatile trends, you should focus on identifying the overall price structure through price action analysis. In most cases, volatile trends are part of bigger corrective structures, such as the wide trading ranges shown by the rectangles drawn on the chart below.

Chart 5: Volatile trends as part of a large trading range

The chart above shows that the volatile trend witnessed on the GBP/USD daily chart was part of a bigger corrective structure. The only trades available for aggressive, experienced traders were at the bottom and top of the rectangle, and even then, the price failed to reach the top during the last rally. Therefore, you should always be ready for the unexpected when you are trading a volatile trend.


The bottom line

It is not prudent for beginner and intermediate traders to trade volatile trends because they could increase their chances of becoming profitable by focusing on stable trends. However, experienced traders can trade volatile trends based on the overall price action analysis to determine if they are part of a larger structure.

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