Markets often transition from one predominant state to another. As a market trader it is imperative that we identify the markets current state before we determine how of if we will trade. First we need to define the main states of the market and then determine the best way to trade that market. For me I distinguish the market states as follows.
- Moving market………. the market is moving boldly whether forward or back and forth. This is the type of market we witnessed last fall and early winter. This type of market is ideal for breakout trading and pass thru trading.
- Trending market……… Almost any trade style is going to work in a trending market. If you can spot a trending market before it ends you can make money almost any old way.
- Wild market…….. Where you have wild swings in the market without discernible direction. This type of market is good for pass thru trading. Example the end of February and 1st of March.
- Raggedy market………. That we have just experienced this market since we went to daylight savings early in March The market raggedly moves about, languishing, reversing most breakouts and does not have the energy for pass thru trading to work. This kind of market is best to stay out of.
- News Market……….. Is the market in a tight channel prior to news? If so then it is a potential pre news trade setup. If it is wild and wolly it is best to stay out of it.
PUT YOUR MAXIMUN ATTENTION IN DETERMINING THE STATE OF THE MARKET BEFORE TRADING. If you correctly determine the state of the market you can then and only then implement a trade plan that will give you maximum return with minimum risk. Just as the direction of the whole stock market determines the direction of individual stocks, so the behavior of the currency market affects how it can be traded.
Just remember the shorter your trading time frame the more minscule twists of the market will whip you about. If you trade the bigger trends, then the micro problems will not affect you as mcuh.
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