The Quest for a "Kill Switch" Signal

One of the things on my forex wish-list is an anti-signal that effectively blocks trades at difficult points in the market. I think of this as a "kill switch" that would turn off my entire trading system at times when the market's behaving so strangely that it's too dangerous to be trading. For example, my system tends to fare worst in situations where price is ranging through a fairly narrow channel and no clear long or short trend has emerged. In ranging markets, my signals keep looking for that next step up or down in price that would logically follow in a trending market, but which in a ranging market often turns into an abrupt reversal instead. So I'm always staggering along one step behind, and losing money on each reversal. Here's a good example of a ranging EUR/USD market that cost me a lot of money in May and early June of this year:

Essentially, then, I'm looking for an accurate way to detect ranging market behavior early on so I can disable my trend-based signals. A nice bonus, once I've gotten that switch built, would be to develop a whole new set of signals for ranging markets that would be activated by the same switch. (After all, as I noted in my process of elimination post, turning off one signal often means you're turning on another one.)

In some ways this may be a fool's quest, based on an impossible ideal: namely, that you can easily identify a ranging market and start making accurate trading decisions before it becomes a trending market again. So far all of the indicators I've tested have too much of a lag built in, and just as they come to the conclusion that the price is truly ranging, it heads off on an upward or downward trend. For instance, in the illustration above, the market suddenly began a major downtrend and sank around 400 pips by mid-June. If I had a kill switch operating, would I have been able to get my trending signals turned back on in time to turn a profit? I'm coming to the conclusion that one of the costs of having sensitive trending signals is having a high failure rate in ranging markets. As long as the market is trending more than it's ranging, you'll do OK, but you'll be in for some painful stretches along the way.

But enough theorizing. The fact is, I already have all kinds of kill switches built into my system that I'm just taking for granted. For instance, a stop-loss is essentially a kill switch. So are my signals that prevent any short trades when certain long signals are generated, and vice versa. So are situations where neither a long or short signal is generated.

I'd still love to find a quick way to detect ranging markets, though - so if you have one you're willing to share, please post it in the comments!

Related topic: Trading by the Process of Elimination