The First Rule of Trading Forex
The First Rule of Trading Forex
Have you ever found that your trading system works great one day but fails miserably the next? If so, your problem is likely market-type identification.
Too many forex traders will trade the same way no matter how the market is behaving. Instead, you should identify the market type first. Then, you can devise a strategy appropriate to that market type. Sounds simple, right?
With the proper technique and a little practice, you will be able to quickly tell what market type you’re in and how to trade it. There are six primary market types in forex that you need to be able to identify:
– Bull Normal
– Bull Volatile
– Bear Normal
– Bear Volatile
– Sideways Quiet
– Sideways Normal
If the market type is quiet, wait for a breakout or range trade. If the market type is bullish, look to buy dips. If it’s bearish, look to sell rallies.
When Market Types Change
Like the weather, market types shift and change. The good news is they do so in a predictable manner. Volatile market types settle into normal then quiet markets. Bull markets turn sideways before they turn bear, and quiet markets expand into trending bull or bear markets. As a trader, you want to be aware of what market typically comes next and plan accordingly.
How to Identify Market Types
While there are numerous ways to identify market types, here is an intuitive model you can follow.
For this, we use two sets of indicators:
– Bollinger bands
– A 7-period and a 3-period Exponential Moving Average (EMA)
These can be applied across any timeframe on any chart. They provide you with an easy-to-use method of identifying the current market type.
Bull Normal Market Types
A bull normal market type can be identified by the price trading above the Bollinger band, while the 3-period moving average is trading above the 7-period.
In a bull normal market type, there are generally two strategies that will be effective:
- Buying dips. You set limit orders at key levels or wait for a pull-back. This is an indication that the trend is going to continue.
- Buying breakouts. You wait for periods of consolidation and then buy breakouts in the direction of the trend.
Bull Volatile Market Types
Bull volatile market types can be identified by large candles trading above the Bollinger bands. These candles will often have long wicks.
In volatile bull market types, it can be tempting to rush in 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 be in a position that turns into a volatile bull, then keep your stops tight.
Bear Normal Market Types
Bear normal market types can be identified by the price trading below or along with the lower Bollinger band and the 3-period moving average remaining below the 7-period.
For a bull normal market type, sell on rallies or breakouts after a period of consolidation.
Bear Volatile Market Types
Bear volatile market types can be identified by the large candles trading outside of the Bollinger band.
Similar to the bull volatile market type, the bear volatile market type is a difficult one for entries. However, if you find yourself in one, as you often will, keep your stops tight to guard against the reversal. This will allow you to capture profit if the move continues. It will also allow you to keep hold of most of your profits if it quickly reverses.
Sideways Quiet Market Types
You can identify a sideways quiet market type by the Bollinger Bands tightly coiling around the price.
Breakouts from sideways quiet market types can provide excellent risk/ reward trading opportunities. Be patient and stalk the breakout like a hunter stalking their prey.
Sideways Volatile Market Types
Sideways volatile market types can be identified by expanded Bollinger bands moving sideways and the price contained within the range.
There are some excellent trading opportunities for range trades during sideways volatile market types. Wait for the edge of the range to be penetrated and the price to reverse back inside before you place the trade.
Learning to identify the market type and apply the right strategy will significantly impact your trading.
Now, take out your trading plan and note:
- How you will identify the market type
- How you will trade it
Once you turn these notes into regular habits, you should start seeing better results.
Silver got no love last week, suffering its worst week in thirteen weeks, and raking up a fourth straight month of losses. After losing US $1.35/t.oz between September 13 and September 18, the metal closed on Friday at US $22.38/t.oz. Before last week, Silver had not traded sub-US $22.50/t.oz for the entire 2021. One would have to rewind their charts to November 2020 to find Silver trading below US $22.50/t.oz.
The last two weeks haven’t exactly been ideal for the major US indices. In times like these, perhaps it is good to remind ourselves how far the indices have come in the year to date. If anything, reminiscing about the indices extraordinary gains in 2021 should help us contextualise the minor misfortune befalling stocks and indices in September.
Palladium is currently trading at USD 1,974/t.oz, a 13-month low for the soft silver-white mineral. In August 2020, Palladium was trading at such a price before it shot up within a hair’s width of USD 3,000/t.oz. The metal’s current price is sitting snuggly between two weak touchstone levels. Over the coming trading week, we could see Palladium claw itself back up to USD 2,200/t.oz, rejecting prices as low as USD 2,000/t.oz but remain suppressed from current levels or break lower into a pocket between USD 2,000/t.oz and USD 1,760/t.oz
Black Bull Group Limited (trading name: BlackBull Markets) is a New Zealand registered and incorporated company (company number: 5463921).
We are also registered with the Financial Services Provider Register (number: FSP403326).
Black Bull Group UK Limited is registered in United Kingdom, Company Number – 9556804. Payment clearing services provided by: BlackBull Group UK Limited (Company Number – 9556804) Address – 483 Green Lanes, London, Greater London, United Kingdom, N13 485
Risk Warning: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money you cannot afford to lose. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any questions or concerns as to how a loss would affect your lifestyle.
All payments related to the Paysafe Group are facilitated by Black Bull Group Limited.
Copyright © 2021 Black Bull Group Limited. All Rights Reserved.