How to Identify Choppy Markets

Traders ask us, “AbleTrend trading software works great on days when the market is trending, but how does it work on choppy days?” Dealing with choppy markets is a major concern for many traders. You may have often heard: “The trend is your best friend in trading,” or “Don’t trade choppy markets.”

So what is a choppy market? What is behind its erratic movement? And how can you avoid it? If there is a way that you can deal with choppy markets well, your profit will take care of itself. The AbleTrend Guidance Chart is one of the best tools available to help you deal with choppy markets successfully.

What is a Choppy Market?

A choppy market, also known as a sideways market, is the opposite of a trending market. In a choppy market the price trades within a very narrow range, bouncing up and down. A sideways market can experience periods of acute price fluctuation where the market shows no clear direction. Unfortunately, many traders get caught in such a market because it’s difficult to identify a choppy market at its early stage. An acute fluctuation can sometimes be mistaken for a trend reversal.

Spot Choppy Markets with AbleTrend Trading Software

In order to win in the market you need to maximize profits and minimize risk. AbleTrend trading software can help you minimize risk by a) spotting sideways markets early, b) helping you avoid entering some sideways markets, and c) guiding you to enter the market only after breakout signals indicate the market has changed from a sideways-moving market to a trending market. More and more, users of AbleTrend trading software rely on AbleTrend Guidance Charts as a tool to deal with choppy markets.

AbleTrend Guidance Charts work by using two time frames and 2 different AbleTrend algorithms all on the same chart: a longer time frame (9 minutes on the sample chart below), and a shorter time frame (3 minutes on the sample chart). The 9-minute time frame defines the direction of the market and tells us where the hidden support and resistance levels are on the higher time frame, while the 3-minute time frame helps us to enter at a better price as well as showing where the hidden support and resistance levels are on the lower time frame.

By using two time frames, the AbleTrend Guidance Chart helps to filter out some of the market noise. Only genuine trend reversals are given with clear buy or sell signals. The rules to follow are, you buy when a blue bar, large blue dot, and blue X all appear on the chart, and exit on the appearance of a large red dot. You sell when a red bar, large red dot, and red X all appear on the chart, and exit on the appearance of a large blue dot.

The chart below shows you how AbleTrend trading software helps to deal with a sideways market. In this example, following our simple rules, no trades were taken at 8:33am and at 10:06am because of conflicting colors.:

AbleTrend helps to deal with a sideways market

Following is an example of choppy market for swinging trading:

AbleTrend helps to deal with a sideways market

If you avoid choppy markets, profit will take care of itself during trending days! Once you know how to use AbleTrend software to identify choppy markets and recognize trading sweet spots (we’ll show you how in the next mini-course tomorrow), you will never again worry about missing a big move or getting stuck in frustrating whipsaw markets.

Guidance Charts Empower “Low Risk, or No Trade.”

One of our clients shared his disciplined way of trading with us. He only enters trades at ideal setup points. He never chases the market. When he misses a good entry point, he just lets the market go on without him. He says, “If I don’t trade, at least I will not lose.” He just moves on to do something else, such as watching movies on his DVD player.

This is a good method for all of us to consider using. Don’t keep watching the computer monitor, desperate to make a move. Beware of trading under the influence of market impulse. Market impulse is dangerous. Remember: Discipline, Discipline, and Discipline.

There will always be good setups for good trades, so don’t become obsessive over “the one that got away.” And never chase the market movement after the fact. Always follow your predefined and well-tested entry and exit rules. When you are intent to enter a trade, briefly evaluate the Reward/Risk ratio. You may use STARC bands or Bollinger bands as your profit target – the reward, and the second level of Abletrend 2 dots as your stops to keep risk low. You need real-time stops as guidance to help you manage your trades. The detail settings and signals are objective, so the influence of emotions and market impulses can be reduced if you follow the signals with discipline. AbleTrend Guidance Charts can help filter out most of market noise. Here are some charts with the AbleTrend Guidance Chart applied in a choppy market, and then in a trending one:

AbleTrend Guidance Chart with a Choppy market

AbleTrend Guidance Chart with a Choppy Market

AbleTrend Guidance Chart with a Trending market

AbleTrend Intelligent stops are defined by market's support levels

AbleTrend Intelligent stops are defined by market's resistance levels

When market trends come, they come with abundance. Only well-trained traders can catch them effectively. From hindsight it’s easy to see the proper entry and exit points, but in real time there is too much information that hinders traders from making the right decisions in a timely manner. Does something exist that can help you make the right trading decisions consistently? Yes, AbleTrend trading software.

Here’s another example involving two E-mini S&P trading charts. The first one is from Monday, May 9, 2016, and second is from Thursday, March 16, 2017.

Monday May 9, 2016

AbleTrend Guidance chart helps to filter out noises

Thursday’s chart – 3/16/17

AbleTrend helps to filter out market noises

Examine these charts and you can see the rules for following AbleTrend Guidance Charts are simple and consistent, and therefore practical to apply.

Be There at the Right Place, at the Right Time

When a market has experienced an extended period of low volatility, it is just as important to know when not trade as it is to know when to trade.

In a low volatility whipsaw market condition, prices can run stops, but there is no assurance they will continue on meaningfully. A market can break out to take out the highs, and then turn around and take out the lows. Such markets will continually test the limits within a small range.

That kind of price action doesn’t fit with traders’ thinking:

After a number of failed attempts, traders’ spirits are completely exhausted. They eat their losses and accept defeat just as the real opportunity walks by. Our goal is to delay action until the optimal entry presents itself. We want to show up at the right place at the right time. And this is what AbleTrend Guidance Charts help us to do.

Preserve your spirit and energy for the right time

There is a Chinese saying, ‘Yi Gu Zuo Qi,” which roughly translates to “The First Drum Roll to Rouse the Spirit.” The story of how an ancient battle was won sheds light on how traders can similarly be worn down by market noise and made to be easily defeated.

The story tells of a battle between two forces, the Qi and the Lu. Qi was larger and more powerful than Lu, and Lu had little chance of defending itself.

As the battle approached, the Lu devised an ingenious strategy that allowed them to defeat the superior force. The Lu troops were instructed to wait until the third drum roll to engage in battle. As the battle began, the Qi soldiers rolled the drums beckoning the opposing force to fight, and then charged the battlefield. The Lu did not engage.

A second time, the Qi rolled the drums, and again the Lu did not engage.

Finally, upon the third rolling of the drums, to the surprise of the Qi, a fresh and eager Lu force swiftly defeated an exhausted opponent.

Following the battle, the Lu councilor explained why he said to wait for the third rolling of the drums: “Fighting needs spirit. Their spirit was aroused by the first roll of the drums, but was depleted by the second. And it was completely exhausted by the third. We started to attack when their spirit was exhausted. That’s why we won.”

How many times has the market made you feel like the exhausted force? Noise in the market beckons traders to take action, yet does not follow through with the expected price action. The trading range remains compressed and yet it is just wide enough for traders to lose money after repeated whipsaw moves.

The markets are unpredictable. Some days they trend and some days they are choppy. Some people wish for a crystal ball to help them deal with the market, but you don’t need a crystal ball. You’ll get along with the market well if you can train yourself to follow the signals of AbleTrend Guidance Charts with discipline.

May this ancient wisdom along with its modern application in today’s market be the blessing for your trading success.

You can find more about how to define choppy markets with AbleTrend here.

Here is a video by Ron demonstrating how AbleTrend deals with choppy markets.

For additional insights and articles on trading see our blog:

Or watch archived sessions from our introductory and member’s webinar video series: Click here to view our youtube page

To your prosperity,

The AbleSys Team