Which Market Condition is Best for You?
- By FXT
- December 11, 2023
- FXT Analysis
Not all market conditions are created equal. While some people focus on trading high volatility markets at high volatility times, others like a slower or more controlled approach. So what market conditions are there, and what are the best ones for your trading style?
Type of Pricing and Direction
A trending market is a market that is clearly moving in a particular direction and can be either bullish or bearish, meaning upward or downward respectively. It can be seen visibly on a chart with ease. Trending markets are great for traders looking to buy, or sell, and hold that position for some time, or to simply take advantage of the likely direction if the market continues in that trend.
The opposite of a trending market, a range bound market is when price is trading within a certain price range, bouncing from one point to another with relative consistency. This type of trading is great for people looking to trade within a certain range and exit at the other side. It can be traded as reversals off Support and Resistance levels. A break of the range can also lead to breakout trade opportunities, where the market shoots off outside of the previously ranging market.
News and Events
News and events often bring added volatility, making the markets move with more velocity and range. Trading around these events can be seen as somewhat unpredictable, but the FXT Economic Calendar has tools that can help traders determine potential direction based off historic data announcements, including the difference compared with the forecasted data (high, lower or matching) along with additional insights such as the range and direction of trade following the announcements.
Unexpected events can also bring on big volatility.
This refers to a market that has pricing within a certain expected deviation. The Bollinger Bands and other trend tools can be used to identify whether a market is ‘normalised’ or not but using a deviation figure on the indicator such as 1 or even 0.6 and lower. This can give traders the understanding that the price is trading within ‘normal’ pricing based on the indicator, and may help offer more normalised market action for traders. This may also indicate that volatility is limited in the trading scenario.
Overbought or Oversold
Pricing that is outside of Bollinger Bands or in high or low ranges of other indicators can indicate Overbought or Oversold market conditions. While this can happen in News and event periods, this section is referring to normal market conditions that are showing price activity outside of normal conditions, but without news creating the increased volatility.
Bring it All Together
By applying the action and the pricing and direction elements together, it may help you further define your trading plan to ensure you are trading in the market conditions that are right for you and your trading strategy.
As an example, a trader may like to trade in trending markets that are affected by a news event. Another trader may prefer trading in range bound markets with normalised pricing.
Mapping out this concept can help you determine and eliminate certain market conditions from your trading strategy that may be costing you money and may help you to gain laser focus on markets that have the environment where your strategy thrives.