18. How to identify Market Environment
Unless you know about the Forex market and the ways to identify the market conditions, you cannot use the trading tools appropriately. You cannot obviously use a screw driver to clip and pull stuffs. Knowing the market helps a trader come up with his strategies and tools to use in the process of making money through Forex trading. Forex market provides with various opportunities to use your strategies but the only thing is as a trader you should be in a position to identify the market and plan accordingly. In other words, knowing when to trade and when not to trade can make things easier for you.
There are two types of markets which you should know about:
- Trending or Impulsive market
As the name indicates a trending or impulsive market is the one which is moving in one particular direction.
How do you know the trend? Look out for the higher highs and higher lows in case of an uptrend. Similarly Lower highs and lower lows indicate a downtrend as shown in the diagram above. Liquidity is a key factor in trend based market environment because higher the liquidity, higher will be the price movement. More the price movement, more will the chances of price moving in one direction. Let’s take a quick look at some of the technical tools and indicators you can use to determining a trend based market environment.
The flow of the Bollinger bands in the chart clearly indicate if it is an uptrend or downtrend.
ADX stands for Average Directional Index Indicator. ADX is a custom indicator that used to differentiate between ranging and trending markets. ADX uses values ranging from 0 to 100 to determine the direction of price movement. Higher the value stronger will be the trend.
Another indicator which can tell you about the market trend is moving averages. You can chart multiple moving averages for different time periods and wait to see that the lowest time period moving average moves above the other two. This indicates an uptrend and similarly if the lower period ones are below are the higher period SMA, it indicates a downtrend.
- Ranging or Corrective market
In a Ranging market environment price tends to bounce in between a range. Which means price doesn’t move higher than the high and lower than the low in a specific time frame. Oscillators are well suited to determine a range bound market. They are used to determine the overbought and oversold market conditions.
To summarize, most of the indicators which we spoke about are lagging indicators and they themselves cannot be used to determine the trend on a standalone basis. In a real time scenario it is required that multiple indicators be used in combination to assess the market conditions and plan your trading strategies. Whether it be trending or ranging market you should realize there is scope of making profit out of both the conditions. And we know that you are by now flexible enough to adjust according to the market conditions.