The first rule of Forex trading »Identification of the type of market

First rule of forex trading »Identify the type of market

Have you ever found that your forex trading strategy works great one day but fails miserably the next? If so, your problem is probably identifying the type of market. Too many forex traders will trade the same regardless of market behavior. Instead, you must first identify the type of market. Then you can design a strategy suitable for this type of market. Sounds simple, right?

With the right technique and a little practice, you will be able to quickly tell what type of market you are in and how to trade it. There are six main types of forex markets that you should be able to identify:

  1. normal bullish
  2. volatile bullish
  3. Normal bearish
  4. volatile bearish
  5. Calm side
  6. Volatile side

If the type of market is calm, wait for a significant breakout or level change. If the type of market is bullish, look to buy pullbacks. If it is bearish, try to sell rebound attempts.

Market types change

Just like the weather, market types change and change again. The good news is that they do this in predictable ways. Volatile market types settle into normal and then calm markets. Bull markets turn sideways before becoming bearish and calm markets turn into bull or bear markets. 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, here is an intuitive pattern you can follow. For this we use two sets of indicators:

Bollinger bands
A 7 and 3 period exponential moving average (EMA)

These can be applied at any time on any chart. They provide you with an easy-to-use method of identifying the current market type.

1. Market hmore normal

A normal bull market can be identified by the price trading above the Bollinger band, while the 3-period moving average is trading above the 7-period.

The strategy

In a normal type of bull market, there are usually two strategies that will be effective:

  • Buy withdrawals. Set limit orders at key levels and wait for a withdrawal. This is an indication that the trend will continue.
  • Buy the broken level. You wait for periods of consolidation and then buy breakouts in the direction of the trend.

2. Market hextremely volatile

Volatile bull market types can be identified by large candles trading above the Bollinger bands. These candles will often have long wicks.

The strategy

In volatile bull market types, it can be tempting to hurry up and buy. However, this may not always be the best course of action. Keep in mind that prices can quickly reverse. If you are lucky enough to find yourself in a position that turns into a volatile bull, keep your stops tight.

3. Normal bear market

Normal bear market types can be identified by price action below or with the lower Bollinger band and 3-period moving average remaining below period 7.

normal bear market forex trading

The strategy

For a normal type of bull market, sell on rallies or breakouts after a period of consolidation.

4. Volatile bear market

Volatile bear market types can be identified by large candles trading outside the Bollinger band.

The commercial strategy

Similar to the volatile bull market type, the volatile bear market type is difficult for revenue. However, if you find yourself in one of them, as you often do, keep your stops tight to avoid reversing. This will allow you to take profits if the move continues. It will also allow you to withhold most of your profits in the event of a quick setback.

5. Quiet side market

You can identify a calm side market type from the tightly wrapped Bollinger Bands around the price.

calm side market of forex trading

The strategy

Breakouts of calm side market types can provide excellent risk / reward trading opportunities. Be patient and chase escape like a hunter stalking its prey.

6. Volatile side market

The volatile side market type can be identified by extended Bollinger bands moving sideways and the price contained within the range.

The strategy

There are excellent trading opportunities during side volatility market types. Wait for the edge of the range to penetrate and for the price to reverse within before placing the trade.

Bathroom in the room?

Learning to identify the type of market and apply the right strategy will have a significant impact on your trading.

Now get your trading plan out and write:

  • How will you identify the type of market
  • How you will negotiate

After turning these notes into regular habits, you should start seeing better results.

Article by Mark O’Donnell » BlackBull Markets Official site

BlackBull Markets is a true ECN broker, with no dealing desk, offering institutional quality products and services available. Proprietary trading order aggregation system that reduces spreads by increasing execution speed and available markets. Personalized account support with a personal account manager with 24/7 live support.

Disclaimer: The information and opinions contained in this report are provided for general information purposes only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein comes 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 that may arise from anyone who relies on such information.

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