First Rule of Forex Trading » Identify the market type
Have you ever noticed that your forex trading strategy works great one day but fails miserably the next? If so, your problem is probably identifying market types. Many forex traders will trade the same regardless of market behavior. Instead, you need to identify the market type first. Then you can design a strategy suitable for such markets. Sounds easy, right?
With the right strategy and a little practice, you’ll quickly be able to tell what type of market you’re in and how to trade it. There are six main forex market types that you should be able to identify:
- Normal bullish
- Volatile bullish
- Normal bearish
- Volatile bearish
- quiet side
- unstable side
If the market pattern is calm, wait for a breakout or a significant level change. If the market pattern is bullish, look to buy pullbacks. If it’s bearish, look to sell the bounce attempt.
Changing market patterns
Just like the weather, market patterns change and change again. The good news is that they do so in predictable ways. Volatile market patterns are normal then settle into quiet markets. Bullish markets turn sideways before turning bearish, and quiet markets turn bullish or bearish. As a trader, you want to be aware of the market and plan accordingly.
How to Identify Market Types
While there are many ways to identify market types, there is an intuitive pattern you can follow. For this we use two sets of indicators:
– Bollinger Bands
– A 7-period and 3-period exponential moving average (EMA)
They can be applied to any chart at any time. They provide you with an easy to use method to identify current market patterns.
1. Market hRegular Australia
A typical bull market can be identified by price trading above the Bollinger Bands, when the 3 period moving average is trading above the 7 period.
In a typical bull market type, two strategies will generally be effective:
- Buy withdrawal. You set the limit order at the key level and wait for the withdrawal. This is an indication that the trend will continue.
- Buy broken one layer. You wait for periods of consolidation and then you buy breakouts in the direction of the trend.
2. Market hflightless bird
Volatile bull market patterns are identified by large candles trading above Bollinger Bands. These candles will often have long wicks.
In volatile bull market types, it can be tempting to rush in and buy. However, this may not always be the best course of action. Note that prices can reverse quickly. If you are lucky enough to be in a position that turns into a volatile bull, keep your stops tight.
3. General bear market
Typical bear market patterns can be identified by lower or lower Bollinger Bands and 3 period moving averages remaining below 7 periods.
For a typical bull market, sell on a rally or breakout followed by a period of consolidation.
4. Volatile bear markets
Volatile bear market patterns can be identified by large candlesticks trading outside Bollinger Bands.
Similar to the volatile bull market type, the volatile bear market type is difficult to enter. However, if you find yourself in one, as you often do, keep your stops tight to protect against reversals. This will allow you to capture profits if the move continues. This will allow you to retain most of your profits in case of a quick setback.
5. Quiet Side Market
You can identify a quiet sideways type of market by Bollinger Bands wrapping tightly around the price.
Quiet side market type breakouts can provide excellent risk/reward trading opportunities. Be patient and stalk like a predator stalking its prey.
6. Volatile neighborhood market
The volatile sideways type of market can be characterized by extended Bollinger bands moving sideways and prices within ranges.
There are excellent business opportunities during the volatile market types surrounding. Wait for the edge of the range to be penetrated and the price to reverse inside before trading.
Learning to identify market types and applying the right strategies will have a significant impact on your trading.
Now figure out your trading plan and write it down:
- How do you identify market types?
- How do you negotiate?
Once you make these notes a regular habit, you should start seeing better results.
Article by Mark O’Donnell » Black Bull Markets » Official site
Blackbull Markets is a true ECN broker, without dealing desk, offering institutional quality products and services. Proprietary trading order aggregation system reduces spread while increasing execution speed and available market. Personalized account support with a personal account manager with 24/6 live support.
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages incurred by anyone relying on such information.