Non-Directional Trading is a form of speculative investment that is gaining more and more ground. It contrasts with classic directional trading, with which it has little in common. In fact, it aims to overcome its limitations and propose a new way of understanding trading. This article discusses it, describing the differences with the more classic types of trading, exploring the advantages and disadvantages, threats and opportunities. Several of those more traditional approaches are covered in 5 proven forex trading strategies.
The Limitations of Directional Trading
Directional trading can be defined as the most classic and linear form of speculative investment. Trading bases its activity on the trend. It seeks to follow the trend or move in the opposite direction, but the trend remains the guiding star, the element around which operations revolve.
Although it is the most widely used form of trading currently, and indeed represents the standard for all traders, it poses some disadvantages or, to put it better, complicated difficulties to manage. Here are the main ones.
It is based on price prediction. Whether you adopt a counter-trend or following trend approach, your goal is always the same: to predict the price. It is not exactly the easiest objective to achieve. In fact, just trying it means practicing technical and fundamental analysis with all the trimmings, at least theoretically perfect.
Estimating the beginning and end of a trend is complicated. Directional trending, as already noted, is based on the study of the trend and its use in order to generate profit. This means that the trader is called upon to estimate the beginning and end of the trend itself, in some way to circumscribe it. Again, these are rather complicated activities.
It does not allow you to earn always and in any case. If it is true that the guiding star is the trend, this means that operating "in the absence of a trend" is really complicated, if not impossible. In essence, lateral phases always represent a reason for difficulty for traders using the directional approach. In reality, earning is also impossible if the downward trend, since you can only sell, at least immediately. Unless, of course, derivative products such as Futures and CFDs are used.
What is Non-Directional Trading
Non-directional trading is a whole different story. Its purpose is not to exploit an upward trend to increase the value of one's portfolio and generate a surplus in the medium to long term. Its purpose is not even to sell short through derivative products.
The true purpose of non-directional trading is to exploit the price differences that develop not from trends but from volatility, that is, from sudden, immediate oscillations that are often "devoid of analytical meaning". That same territory is covered by volatility breakout trading strategies.
It is a radical paradigm shift, and it impacts both from an operational point of view and as far as analysis activities are concerned.
Non-Directional Trading is Characterized by Three Main Advantages. Here They Are.
- Exploiting volatility. Volatility is one of the important phenomena of the market, it is probably the phenomenon that develops with the greatest frequency. Non-directional trading, therefore, takes advantage of something that is extremely abundant and never runs out. Consequently, the earning opportunities are superior, at least on paper.
- Earning regardless of the trend. The name itself says it: Non-directional trading does not follow the trend. The trader who adopts this approach does not care if the general trend is upward, downward, if it exists or does not exist. They could operate profitably even during lateral phases. The only element fundamental to them is volatility, or rather oscillations, and these are present during all market phases.
- Decreases the depth of analysis. If it is true that the trend loses its meaning, then it is not necessary to study it with the utmost dedication. Therefore, the analysis activities are lightened, in some way they undergo a reduction in terms of time horizon and depth.
The Limitation of Non-Directional Trading
If it is true that non-directional trading exploits volatility and oscillations, then the trader's task is to identify the signals of price increase or decrease in the very short term. In essence, as soon as the price hints at recovering, the trader buys. As soon as the price hints at decreasing, the trader sells. This simple dynamic, which therefore does not take into account general and long-term movements, actually poses some drifts. Here they are.
Restricted Earnings
If the game is played on very short-term oscillations, then it is clear that earnings can never be high, at least considering the single trade. In fact, it is extremely rare for the price to change substantially from one minute to the next, from one hour to the next. This poses the need to produce many trades throughout the day, according to an approach that closely resembles scalping.
Certainly scalping is a much more frenetic, even stressful form of trading. And the substantial difference between scalping and non-directional trading: the former is based on an intuitive type of action, the latter is based on the use of indicators that signal the price change with a certain advance. The by-product of both approaches, however, is the same: very small single gains, the need to score several trades throughout the day.
Need to Rely on a Robot (Because Episodes of Volatility
In theory, to take advantage of a non-directional trading activity, it is necessary to engage in a constant and almost all-encompassing manner. If the only way to earn is to produce many investments, the trader is forced to attend the market for long periods of time, with all that follows in terms of physical and psychological endurance.
Certainly, the most trained traders are able to withstand the effort. For everyone else, doing directional trading means making use of external support, i.e. software that acts automatically, responding to the same stimuli that the "human" trader would respond to.
The need to practice automatic trading can be considered in all respects a drift of directional training, also because, to date, software such as robots and Expert Advisors have some limitations, although they can be considered very useful tools in general. Their reliability is often judged through non-parametric backtesting in trading.
