Market conditions and phases
Information is not investment advice
The market isn’t always the same. In order to choose the best trading strategy, you need to understand the market’s condition. There are two types of market conditions: a trend (a sustainable movement to the upside or to the downside) and a range (price fluctuations in a horizontal channel).
It’s necessary to apply a strategy that fits the current condition of the market. If you use a trend trading strategy in a ranging market, you will likely lose money and, vice versa, if you use a range trading strategy, then you’ll lose money in trending markets. Always start your technical analysis with identifying the market’s condition, so that you could then pick an appropriate strategy.
It’s important to understand the underlying logic of trends and ranges.
First of all, keep in mind that the price moves as a result of supply and demand for the currencies which form a currency pair. If there are more buyers of the euro than those of the US dollar, EUR/USD will tend to rise.
A price stays within a horizontal range when the powers of buyers and sellers are mostly equal. As usual, the market is in the situation of uncertainty: the majority of traders lack the information to join one of the camps.
At some point, new information appears and either bulls or bears manage to break the range and start the directional movement of the price. If this movement is sustained, we get a trend. During a trend, there will definitely be periods of the so-called consolidations (i.e. ranges) and corrections (i.e. short counter-trend moves) as market participants take profit and re-adjust their positions. These shorter moves may provide opportunities for range trading on lower timeframes.
Other articles in this section
- Fibonacci retracement
- Reversal candlestick patterns
- Continuation candlestick patterns
- How to backtest a trading strategy
- Gator Oscillator
- Awesome Oscillator
- Alligator indicator
- Bill Williams theory
- Chart patterns
- Uncovering Gann indicators
- How to create your own trading strategy?
- Candlestick patterns
- Trend trading
- Carry trade
- Swing trading
- Position trading
- Day trading
- Trading styles
- Fibonacci tools
- Trader's psychology
- Japanese Candlesticks