Range Bound and Trending Markets
Let’s quickly recap the different types of market. Forex markets tend to be either range bound, where a currency pairs trades between two specific points of support and resistance with no sign of breaking these points, or trending where the currency pairs fluctuate reaching new highs and lows, breaking points of support and resistance to form new points.
When trading a range bound market it is advisable to buy low and sell high, this maximises profit and minimises loss. With a trending market it is advisable to trend in the same direction of the market. Rather similar to swimming in a strong current, it is advisable to swim with the direction of the current rather than trying to fight it, or as is commonly understood, “let the trend be your friend.” It would not be a good idea to go short in a long market or to go long in a short market. It is best to follow the trend, remember it is possible to make money when the markets fall as long as you let the trend be your friend and you don’t swim against the current!
Triangles
In an earlier module we looked at interpreting candlestick patterns and their implication on the market and trades placed on currency pairs. Another pattern you can look out for to inform your trading is the triangular pattern. Triangles are formed when the market starts to consolidate after recent trending period. The high points of resistance become lower due to pressure on buying and the lows become higher with the pressure to sell. As the market consolidates the lines of support and resistance draw closer together creating a triangular shape. The triangle pattern will last throughout the consolidation period, until the market once again breaks out. The longer the consolidation period the greater the break out or break down will be. When triangle pattern breaks it will usually follow the general market trend. The break out can then be used by traders to an initiate a trend in the same direction, as the market letting the trend be their friend.
It can be tempting for traders to initiate a trade as soon as the consolidation period is over and there is a break out where the market goes long, or break down as it goes short. It is not recommended to initiate a trade straight away. What is recommended is to wait and see if this trend continues or whether it was just a false alarm. Many traders lose money be trading a break out immediately and not waiting to see if it falls back down again as a false alarm. To avoid losing money in this fashion it is recommended to do several things. Wait and see if the break out / down trend is sustained. A good indicator that it is sustained is when a full candlestick trades outside of the old consolidating boundaries. When candlesticks do this it is common for the old line of resistance to become the new line of support and vice versa in a short market break down. When the new line of support or resistance is established it is a good time to initiate a trade, making sure that there are no likely indicators that the trade may draw back from the new lines. It is also a good idea to use stops as mentioned in an earlier module to lock in profit and minimise loss.
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