How to Trade Choppy Markets

Shift Ratio Plots on Chart

Shift Ratio Plots on Chart

The Shift Theory Inside Ratio™ is a excellent choppy market trading tool. Choppy markets are measures by the percentage that the current bars overlap the previous bars. There are two parts of the indicator that are used to measure and trade choppy or consolidating markets:

The Inside Shift Ratio™ is the yellow line that measures the percentage of bars overlapping each other on a scale of 0 to 100. 0 means there are no bars overlapping each other and 100 meaning the current bars are over lapping previous bars 100% of the time. The way it works is the higher the percentage of bars overlapping each other the less likely any sudden price changes will follow through. It is a classic sign of a market that whipsaws traders! As a note I will mention that when trading choppy markets a longer length is better then 1 for the Inside Ratio™.

The Trend Point™ is a reference point that you can set to whatever works best for the markets that you trade. The Trend Point™ is used with the Inside Shift Ratio™ as a reference point that if the Inside ratio is above it there is no trend. It specifies at what point that the trend stops. That is why it is called the “Trend Point™”. As a rule of thumb if the Inside Shift Ratio™ is above the Trend Point then there is no trend. The Trend Point™ is nothing more than a visual reference for the trader to see on a chart and compare the Inside Shift Ratio™ to.

Benefits of Trading Choppy Markets

For most traders choppy markets are extremely difficult to trade. In most cases trades do not work out and it is a high risk to reward ratio situation. On the positive side when trading consolidated markets properly the winning ratio of trades is very high. The risk for most trades is usually equal to the reward but the percentage of winners can be over 90%. For those people who like to trade all day or frequently, a choppy market can be an excellent way to earn a living. That is what market makers do and why not you too.

How to Trade Choppy or Consolidating Markets

Shift Inside Ratio NO Trade Zones!

Shift Inside Ratio NO Trade Zones!

Shift Theory Ratios™ are the first indicator that accurately measures how choppy a market is and this can be used in two ways:

  • Knowing when not to trade
  • Knowing when to use counter trend trading techniques

Knowing When Not To Trade

The reality for most traders is that whenever a market gets to choppy they lose most of their gains during these times. If you are a trader who does not do well in consolidating markets then you need to stop trading whenever the Inside Ratio™ is above the Trend Point™. For many traders simply know when to stop trading is the key to success because they will eliminate most of their losing trades.

 

 

Trading Techniques for Choppy Markets

Choppy markets can be fun and profitable to trade if you know what to do. There are two ways to trade in a consolidating market and they are:

  • Tape Reading
  • Technical Analysis

Tape Reading

If you use the Inside Shift Ratio™ as your guide then all that is left is finding entry and exits for choppy charts. There are two fundamental reasons this works. The first is in a choppy market there are going to be order desks that wait all day for a good price to execute trades for their customers. If the price moves to fast they step in on their customer’s behalf and stop the move. That is why most people lose money in these types of markets. Yes they are out to get you! The second is there are traders who tried getting into a false breakout that are going to help drive the price the opposite direction once they get shaken out. Sound familiar?

The technique is recognizing when the price has changed to quickly then stepping in and trying to capture the spread. This can also be done in combination with the Average True Range as a guide to when a bar is abnormally long. Another technique is finding a hidden order. For example you have a buyer that is only showing 1 contract on the bid but every time people keep selling the buyer keeps refreshing the bid but the price never goes lower. This is an excellent point to also buy at that price level. Tape reading comes down to a gut feel that takes time to develop. For those who master it the results cannot be beat!

Technical Analysis for Choppy Markets

E-Mini Scalping Technique

E-Mini Scalping Technique

For most traders tape reading takes too long to learn (6 months to 5 years or more). So the next best technique is using oscillators, price correction bands and the ATR. Some excellent indicators to use in combination with the Inside Shift Ratio™ are:

  • %R
  • RSI
  • Money Flow Index (MFI)
  • Bollinger Bands or any similar indicators
  • Average True Range (ATR)

Most of the above indicators work great in a choppy market but the trick is to use a short length or input. As long as the Inside Shift Ratio™ is giving a choppy market reading these indicators are highly accurate. Just do not hold onto a trade if the Inside Ratio™ gives a different reading because at that point those highly accurate indicators become a traders nightmare!

The technique to use for the %R, MFI and RSI is once they get to 0 you buy and your profit target is 50 on the indicator reading. On the selling short side you wait for them to hit 100 and you sell short and once the indicator hits 50 you cover. Now these indicators are based on the closing price so what they look like in real time is a lot different than after the fact. Now the Bollinger Bands or any correction band is used the way they are designed. If you want to go with the Average True Range as you entry and exit. Then you may want to set up a ratio that gives you the signals. For example the ATR is twice the normal range then you may want to fade the market as long as the Inside Shift Ratio™ indicates a choppy market. Finally you can use any combination of these indicators because the Inside Shift Ratio™ clearly tells you when these indicators are likely to work.

These are just some basic ideas and techniques that I mentioned to inspire traders on new ways to trade the markets. It is up to the trader to decide the best way to apply these techniques.

 

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.