Everybody heard the expression “markets are always changing”. It is included in just about every book or even lengthy article about trading. This mantra sounds very sage, but exactly does it mean? Surely everybody knows that that markets are changing, all it takes is to take a look at any chart. Prices are always moving, especially in currencies, which trade around the clock, and it is visible on every time frame. Even charts of the smallest order of magnitude are in constant motion. Not necessarily huge moves, depending on many factors, but there is always activity. Hardly something profound.

Most of the time traders interpret this phrase as describing markets switching from trading to trending and vice versa. Directional move last for a while, only to be followed by a congestion. Some time later price breaks out of congestion and new trend start. This transition doesn’t happen within single price bar, but takes time to become obvious. It is universal on all time frame, hence the term “price bar” not a week, or an hour. At the onset, we never know exactly how long these periods will lasts, and only find out once they are over. Trending/trading switches are a good example for “always changing markets”, but not the only one.

All types of market behavior are subject to this observation. I call them “phases”. Somebody else can say these are “behavioral cycles”. These are any observable and repetitive (for a while) patterns. Opening gaps trading is one of my trading strategies. They can happen for weeks on end, only to be followed by very long stretches without gaps happening at all, or being sporadic. How many people have received emails urging them to buy “Trading NFP report” super-system? How well would that have worked last few months? What about all the “Forex robots” from last few years? They’ve been replaced by “new and improved” ones, which will disappear, too. Chart patterns keep changing from reliable, to nightmarish, only to become workable again. On and on it goes.

Recently couple of these phases have emerged, or rather changed, neither of which is getting a lot of attention, although they should. One of them is movement of EUR-CHF. It is hardly moving at all, and is practically untradeable. I have not placed a trade in this pair in weeks and will not until it starts moving again. We can attribute this to constant threats from SNB regarding intervention. On the other hand, this cross has been very slow mover historically and current behavior is nothing more than returning to more typical beat.

Simple 10 period ATR was plotted on weekly chart of EUR-CHF. We can see that what this pair is experiencing now, in term of weekly ranges, is pretty much what was the norm before 2007. That was followed by much more volatile stretch of about 2 years, only to slump again. Any strategies used during 2007-2009 period are largely useless now. Eventually, this will change, too and this pair will become more active and accommodating again. Unfortunately, there is no way of telling when this might happen. For what we know, next week might start new explosive period in EUR-CHF, or not much will change for another year.

Another interesting development is how currencies behave on Thursdays. These days have tendencies to be most explosives days of the week now, followed by much quieter Fridays, a change from the past. Used to be that Thursdays were tight range days , with large moves happening on Fridays. This also will not last forever and the relationship will be reversed, probably in a gradual manner, as it often happens. Thursdays will become set ups for bigger moves on the next day.

Since every trading system and strategy relies on some specific market behavior, they can’t be profitable at all times. As markets change, so does effectiveness of systems. It doesn’t, strictly speaking, mean that the method “failed”, but that prevailing conditions, which it tries to exploit, are undergoing adjustments. Strategy may very well return to profitability at some point in the future. Problem is, will account withstand losses while waiting for next phase of the market? Backtesting might provide answer to it, if the look back period is long enough.

This week I remain in less active mode, with fewer trades and smaller size. I will have time to watch the opening today, so gaps are of interest. After that my intention is probably to find more sell signals in commodity currencies. They retreated by good margin last week and I think it will continue, even if not in a straight line. Another thing to pay attention to is the Pound. For now it is still falling, but correction is very possible. Reversals in GBP pairs are of interest to me this week. We will see what happens.

Mike K.