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Rookie Corner: Markets, Systems, and Conditions

April 18, 2019

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So, the inverted yield curve has come and gone and here we sit staring at possibly another all-time high in the major indexes? What gives? Shouldn’t we be shaking in our boots that another recession is coming or another market correction is on deck? Well, if you read through the blog and watched the video I put together in last weeks blog you would see that there is no reason to panic but there is plenty of reasons to keep our heads up for the other pieces of the puzzle that can indicate whether that recession is on the rise or that correction is looming. We talked about what we look for when we see these types of things occur but we didn’t really explore what we need to do from a trading or market perspective if this kind of situation comes to light. That is why this week we are going to delve into what type of markets we come across and what type things we can expect and what types of trading can work best in specific market conditions. Now, this topic is as broad as the markets themselves so we will have to take this one step at a time.

First up on the docket is the different types of markets. We have quiet markets, we have dull markets, we have crazy insane markets and mostly everything in between. This is probably not the most helpful description of the markets if we are trying to build trades or systems around their movements. So maybe we can be a little more precise. We have trending markets, floating markets, and explosive markets. These descriptions talk about the movement of price from a directional perspective, however, this is not the only concern when we look at how the markets move and how we need to approach the trading of the markets. The other concern when approaching the markets is the study of volatility and how it relates to the directional movement.

Let me explain what I mean from the above paragraph. We can have a floating market that has low volatility and the characteristic of that type of market is sideways action with a small price range. On the inverse, we could have a market that is floating sideways but with very volatile price swings. This would be easily identified by large price ranges that really don’t go anywhere. I think it would be very easy to see that these two market types would need to be traded differently? We will delve into exactly the kind of trades we would want to use in these scenarios after we cover off all of the other market types. The markets spend a lot of time in the above conditions and so its important to make sure you have trades and systems designed that work well in these markets.

The next market type we see is a trending market. This is where the day to day movement is going in either one direction or the other. This market type also has a volatility component to it that can be high or low volatility. In a low volatility trending market you will see the prices moving consistently but slowly in one direction. There will always pullbacks in this market but the will continue to fail and then reverse to the original direction at some point. There is also the other side of the coin, a high volatility trending market. This will be characterized by higher high and higher low pivots and larger range type candles. This is a decent market for trend followers and this can bring nice profits if one’s direction is correct or the ability to be nimble is solidly intact. We are currently seeing a low volatility trending environment and the market is drifting slowly upward. This market has been present twice in the last 12 months of trading. This is also a good time to prepare for the next phase of the market.

The next phase has only one market type. The explosive market type is characterized by extreme volatility and big price ranges. This market type is very tricky. This market type will show a big move in one direction and will look a lot like the high volatility trending market but what will happen is that at some point this market type will hit a pinnacle and then reverse violently. If you are on the wrong side of this violent movement then it can be very painful to the account balance if risk management techniques are not well heeled. Astute traders can profit from the initial movement and the subsequent movement as well.

We have identified the different market types here and next week we will deep dive into how and what we want to trade in each of these market types and what pitfalls befall anyone who tries to trade different market types with the same system or methods.

Until then… look through the charts and see if you can’t learn to identify the different market types so that you can learn to adjust your strategies as the conditions change and put yourself into a better position to prosper.

Trade Well Friends….

Coach Holmes

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Tackle Trading

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