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Dynamic Market Trading

There is a new way of thinking about the forex market and a new way of trading that market.

Here is why.

For too long we have grappled with whether our trading should be based on technical analysis or on fundamentals; or on some mixture of both. There are good arguments for all three methods. And good examples can be provided to support all three methods of trading. The problem is that none of them are profitable without significant drawdowns despite the adoption of sound trading skills and discipline. And the statistics tell us that around 90% of traders are never profitable.

Why? Because the interplay of fundamentals with technicals results in an ever changing dynamic of market conditions and hence price action. In the past, the impact of fundamentals was somewhat predictable and resulted in shocks rather than on-going changes in the price patterns which lent themselves to technical analysis.

But in an age of social and digital media immediacy, frequency and unpredictability, and an ever more interconnected world, these fundamentals play havoc with the technical conditions of the market on an ongoing basis. And that results in an ever changing dynamic of price movements and technical patterns.

So to say, as many educators do, that we should device a set of trading rules and stick to them, if applied rigorously, is a recipe for disaster. The notion of setting different rules for so called trending and ranging markets, or volatile and quiet markets, is sensible but is also very timeframe dependent. Is it any wonder that more than 90% of forex traders lose money?

By fundamentals we mean things like central bank decisions, political uncertainties, natural disasters, economic measures etc;
By technical we mean things like price action, Fibonacci retracements and extensions, MAs, RSI, ATR etc

The world and the markets, have moved on from simplistic categorisations and repeatable patterns. Yes, Elliot Wave enthusiasts, harmonic patterns advocates and Fibonacci experts can all point to examples of where their patterns play out. And we should not ignore them. But equally we can point to many (more) examples where these patterns just don’t play out.

And that, in my view, is because the vast increase of influence from fundamentals in recent years, interferes with established patterns of price behaviour. Markets are dynamic far more so than they are predictably cyclical.

Want proof? Here is what you can do yourself to test these ideas.

  1. Open a 4 hour chart. On any currency pair of your choice. You should have about one to two months of history showing depending on your chart setting.
  2. Now scroll back a couple of years – exact time does not matter.
  3. Place two or three of your favourite indicators on the chart and find settings for these indicators that would lead to good entry points and exit point for that period of your chart.
    In other words if you had taken these trades you would have ended up in profit at the end of the period.
  4. Now scroll forward to some period 6 or 12 months on.
  5. Apply the Rules you determined for the previous chart period and see how you would have finished that trading period if you had traded with those Rules, those settings of technical analysis. A couple of randomly chosen examples are shown here.

If you are lucky, you may again find yourself in profit. But I doubt that you will. In any case repeat the exercise a couple of more times.

The changing market dynamics will become obvious and hence following a fixed set of rules is not going to work. You need to adopt what I am calling the Dynamic Market Trading approach.

To do so you have two choices:

  1. Continually adapt your rules to ever changing market dynamics. But beware – this can become a bit like a dog chasing its own tail and never catching it; or
  2. Stick to your rules, but use them only as long as they work, and then wait for the market to return to your rules sometime in the future; if and whenever that may be.

The good thing is that you can execute either of the two Dynamic Market Trading approaches very simply.

Let’s say that you can only attend to your trading a few times each day at most. So let’s trade on the 4 hour (H4) chart. And let’s say you want to trade just 4 currency pairs so that you get a feel for how they behave and react to news.

  1. Set up two accounts on your computer – one with a demo account and one with a live/real account.
  2. Determine a profitable trading strategy for each currency pair – two or three indicators, typical TP and SL settings or ones based on Daily Support and Resistance levels etc – based on the current chart patterns and time of year, ie, the last two months or so of trading history. Write these down.
  3. Since these strategies are currently profitable, as determined by you, trade these strategies on your live account.
  4. If they keep being successful, keep trading on live.
  5. If they start losing, go into drawdown, then at say 10 to 20% drawdown, stop trading those strategies on your live account; AND start trading them on your demo account
    This way you will continue to trade and learn, but without losing any money or giving back those profits you made earlier.
  6. At some point, the market dynamics will probably return in your favour and your strategy will become viable again and trades will end in profit. When that happens, stop trading those strategies on demo, and resume trading those strategies on your live account.
  7. On the other hand, if a strategy keeps on losing consistently it means that the market dynamics have undergone a major change and so you now need to recalibrate your trading rules.
  8. So do the recalibration on the most recent chart data until you have a set of new rules that work profitably again for that period of testing.
  9. Then trade these new strategies on you live account until the market tells you that they are no longer suitable for the new market dynamics. That is, they start losing consistently.
  10. And so on…..


And if all that is too time-consuming and difficult, there is an automated way of doing this using EAs and the new EA Controller.

But that is the subject for another article. Or go here if you are curious http://exceptionalfx.com/

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