2 Market Conditions that We Will Find Constantly and How to Trade Them Profitably
When I first started learning about the Forex Markets, I remember reading somewhere that you must trade with the trend. I spent hours looking at charts trying to guess and find that “magical trend” that could give me a potential home-run. However much later, when I finally learned to trade profitably, I understood that markets are not always trending, and that doesn’t mean you can’t trade them successfully, it only means that you must understand the specific conditions where you are standing and thus your expectations must be different and adapted to each case.
I am sure all of us have heard, at least a thousand times, the adage: “Trade the trend, the trend is your friend”. However for me (a Price Action Trader); it’s very important to take all this “advices” with a grain of salt and try to go a little bit further to understand what price is telling us and exactly how to better understand whatever is happening in the Forex Markets.
As you probably know, markets move in a sideways action at least 60% of the time, or more. That’s why when we are looking for trades we must understand exactly the kind of market we are entering; we must always ask ourselves these simple questions:
- Is the market in a range?
- Or is the market trending?
To better understand what I am talking about, here I’ll post a range bound market (I always use the daily charts to understand the price action story; smaller timeframes are too confusing for me).
Here’s a chart of the AUD/JPY for today: June 26th 2015:
As you can see, for several months price has done nothing but to move in a range and there is no sign that this bias is changing any time soon, so why fight this reality?.
Right now we are in the middle of such range without any clear indication of further direction.
If, for any reason, your system indicates you that you should take a trade in this kind of market, you must be very aware that the trend might not “be your friend” this time, since there’s none.
That doesn’t mean you can’t trade it and make good money out of it, it only means you must trade it knowing that the swings you might get from this market will be choppier and less predictable.
If I was trading this market right now, I’d normally enter only if I have a very clear signal and get out of the trade expecting a smaller profit, because I’d rarely let my trade run, since most likely it will find areas of noise and choppiness all around the chart. However if I find a potential trade and the risk reward is not clearly in my favor I might even skip the trade and wait for the next set up. Trading in range bound markets is normally a riskier proposition.
However if the market we are analyzing and/or getting a posssible setup looks more like this; the chart for today’s NZD/USD market:
Here we might have a much better chance of entering our trade with the trend and maybe even using a strategy to let our position run for a longer period of time, or at least part of our position, since we have a massive bearish force that has been developing itself for several months, and for now there’s nothing that will tell us that this bias is changing.
In this kind of markets wee can expect cleaner and longer moves, trail our stops can be a good possibility and overall we can make a much better trade in a risk/reward aspect.
In conclusion, we can trade profitably the range bound markets and the trending markets as well. However we must be careful to analyze and understand what we are doing and where we are geting ourselves into so our expectations are set according to the reality of the markets.
Our trade plans must always include the case of a range bound market and/or a trending market and we must have the mental flexibility to understand that not all markets are created equal and trade them accordingly.