Trend and Trendless Market Talking Points:
- Forex trading is similar to buying milk or orange juice
- 2 type of market conditions are trend and range
- Match the strategy to the market condition
What if you went to the local store to buy milk only later to find out they don’t have any milk – they sell orange juice. What would you do?
Would you beg and plead with them to provide you milk?
There are a few similarities to trading forex and our milk analogy above. This piece is the 2nd of a 5 part series on becoming a more disciplined forex trader.
Let’s unpack the analogy above, determine what our choices are, then relate it to forex trading.
The way I see it, there are 3 choices in the situation above:
- Buy milk from another store
- Do nothing
- Buy orange juice from store
The choice we ultimately make will depend on why we want the milk. If we want milk because of the specific nutrients it provides, then we are likely to choose #1 or #2 above. However, if we want milk because we simply are thirsty, then option #3 would likely be the easiest choice to make as the orange juice would easily quench our thirst.
Well, forex trading has similar choices and part of the reason many traders lose is because they expect to buy milk from an orange juice store. Let me explain.
As we learned last week, trading is methodical. That means we have a plan and a strategy of when we buy or sell. Part of that plan should also include what market specific condition a strategy performs well in.
It is unrealistic to expect a strategy to do well in all market environments. Each strategy is built with a specific market condition in mind. When that condition doesn’t exist, the strategy experiences losses. When that market condition appears, the strategy tends to perform better. The strategies that outperformed during the 2008-2009 credit crisis tended to underperform in the subsequent ‘thawing’ of 2010.
Two main types of market conditions
The two main market conditions are trending and range.
Trending strategies are the most widely followed and popular. Trends are easy to identify. Trends are also fairly simple to trade. Additionally, so long as you can identify a strong trend, many times, the trend can bail you out of an imperfect entry which is why many new and experienced traders follow trends. (see 3 Ways to Trade a Strong Forex Trend)
The other main market condition is a range or trend less market. Ranges can also be easy to identify as well. Additionally, newer traders typically trade ranges once they have learned how to identify support and resistance levels. This is because you have a fairly well defined level of support and resistance which oscillators tend to thrive in.
Range trading basics is a great place to start and you typically see currencies that are close geographically develop ranges with one another. This is because the trade relationship between the two neighbors is fairly tight and they feed off each other. So both economies are typically strong at the same time or weak at the same time.
As you can see above, both types of markets are fairly simple to identify. However, many traders lose because they apply the wrong strategy to the wrong market environment.
Therefore, once you can distinguish between the two market types, then you simply need to identify which condition your strategy is expected to perform well in. After that, seek out those markets the exhibit that condition.
Using the analogy above, you would be similar to buying milk because you need milk and its specific nutrients. If you can’t find the market that sells milk, or the market that is offering you ranges, then do nothing until you find the market that produces ranges.
On the other hand, many traders have several strategies that they trade. Those traders will identify a market like the EURUSD, then decide which condition it is providing and apply the appropriate strategy to the EURUSD. This would be like buying the orange juice because you are more interested in a liquid to quench your thirst rather than a specific liquid. Said another way, you are more interested in trading the EURUSD (quenching your thirst) rather than trading a specific strategy (the liquid used to quench your thirst).
Part 1 – Trading is Methodical – Markets are Emotional
Part 3 – Disciplined FX Trading – Touching Lines
Part 4 – The First of 10 Trades
—Written by Jeremy Wagner, CEWA-M, Head Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
New to the FX market? Been trading for a while but frustrated with your results? Learn about the market environments and how to time trends in each of those environments in this New to Forex Guide.