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PR07 - Know Your Trading Environment

"For many traders, trading is all about buying and selling when their trading system tells them to. But did you know that the markets do not always remain in the same environment? You might have heard about the fact that the markets trend only 20% of the time. The remainder of the time, the markets tend to move in a sideways range. Applying a trading system that is built for trend based trading and using it in a sideways market can lead to big losses. This is because many traders do not realize that changing environments of the markets. From a sudden shift in the trend to a market shape and a strong sideways range, the trading environment can change quickly. A successful trader is one who is able to understand these changing trading environments and knows when to trade and when to stay out of the markets. In this article, we look at how traders should pay attention to the changing trading environments."

As a forex trader, there is a good chance that you already have a trading system in place. This may be a trading system that you actually saw on a trading forum or something that you might have built by yourself.

Assuming that you have tested this strategy for a while, you are all ready to use in the real markets. However, sooner than later, you might come across situations when the trading strategy fails to work as it is expected to.

Ever wondered why? This is because the markets continue to change their trading environment every now and then. If you do not keep an eye out for these changing conditions, you could expect to see your trading system perform very badly to the point that it could lose you money.

So how does one identify the trading environment and what can you do to stay ahead of this?

Understand the changing markets

The first step starts by understanding the changing markets. Asking yourself the question what the markets are doing is a great place to start. This can be answered by thoroughly analyzing the markets and learning whether the markets are trending or ranging sideways.

There are just two phases in the markets. Of course, it can go by different names. But the simple truth is that the markets are either in a strong trend (rising or falling steadily) or they are moving in a range or within a certain price level.

Obviously, a trading system built for trading the trends will perform badly if it is used in the ranging markets, and vice versa. The best way to avoid these situations is to firstly learn whether the markets are trending or ranging.

There is no easy way to identify this. In fact, there is no trading system that can predict whether the markets will be trending or ranging. It is up to you, and the amount of time that you put into learning about the markets that will give you a hint of this changing market conditions.

Know when to use your trading system

The next step is of course in understanding when to use your trading system. For example, if you have backtested your trading system and know that it works well when the markets are trending, then use this method to trade the trends.

This can change depending on the time frame that you are using. Therefore, pay attention to the time frame factor as well.

It is ideal that you also have a trading system that can allow you to trade the ranging markets. But this is not a requirement. If trend trading is where your strength lies, then simply stick to it.

When the markets are ranging and you prefer not to trade under such conditions, then simply stay away from such ranging markets.

Pay attention to the markets

There is a lot you can learn and understand by simply looking around. For example, if you look at the economic calendar and see that there aren’t any major events scheduled during the week or during the day, you can expect the markets to remain subdued.

This is also the case when you see that there is a major bank holiday in one of the major trading hubs. This way, by simply analyzing the economic calendar and looking into the fundamentals, you can draw up a fair idea of what is happening in the markets.

The ranging markets will help you to either prepare to trade under such conditions or allows you stay away from it.

You can also look to some trend direction indicators such as the Average Directional index or ADX indicator that will give you a sense of idea of what the markets are doing. This will help you to identify the potential changes that can come into the market.

Last but not the least, no matter how strong your fundamental and technical analysis is, there is no way that you can get around to finding a technical trading system that will always give you profits.

Just like it is difficult to predict a trend all the time before it happens, the same way you cannot expect to predict the ranging markets. You simply need to allow price to lead you into what it can do. This means having to pay close attention to the price action and the underlying fundamentals.

There may be a little bit of a lag but by doing so you will be able to better prepare for the changing trading environments.

Read 942 times Last modified on Sunday, 14 July 2019 08:11