What does “trading what’s in-front of you” mean?
It is the craft of first noticing what is going on, and then responding effectively to what’s happening.
In the Forex markets, having an effective response requires a framework of understanding, otherwise we tend to flail about willy-nilly, or stand on the sidelines paralysed and afraid.
The good news is that market types provide us with this framework – both for entering and, perhaps more importantly, for exiting your trades.
While I have written about market types before (here and here), here we will delve into some advanced techniques, which provide an enhanced framework for you to make trading decisions in a complex environment.
If you are wondering how well this stuff works, sign up to the blog, and you will find out next week.
But first, let’s start with a review of some basics.
Your bread and butter: Core market types
There are three core market types in Forex; all other market types are variations of these.
Top traders have different approaches to each of these market types, and you should too. The same strategy won’t work the same way in both a bull, bear or sideways market.
For newer traders, if you simply learn how to trade these three market types you will go a long way to being successful.
Bull market type
A bull market is one that we can identify as clearly going up. When the price breaks out above the Bollinger Band, until the price closes below the mid Bollinger band, you’re witnessing a bull market.
Bear market type
A bear market type, the opposite of the bull market type, is one that we can identify as clearly going down. When the price breaks out below the Bollinger Band, and closes back above the mid Bollinger band, you’ve been through a bear market.
Sideways market type
A sideway market type can be identified when the price is staying range-bound between the Bollinger Bands when they are levelling out.
Within each of these three core market types, there are several variations. Generally, these variations have to do with the volatility of the moves.
It’s an understanding of these subtle variations that will provide you with the most juice.
Because they repeat over and over again, and there is an optimal set of actions to take in each one. For example – in a fast market type, tight stops are the name of the game, but most traders:
- Fail to identify if a currency pair is in a fast market type.
- Fail to tighten their stop appropriately on at least some of the position.
Instead, start to identify what’s in front of you, and have a carefully constructed plan about what do to get the best results.
Take some off
In trading, it can be good to avoid “all or nothing” decisions. There is nothing worse than closing out of a position, only to see it continue on its merry way (or to place a large trade, and helplessly watch it grind into negative territory).
When I discuss what actions to take in each market type below, you don’t have to go all in, or all out. Adjust your position according to what is happening, by adding to your trades and scaling out as appropriate.
Bull and bear quiet
How to identify them:
One of the rarest market types. You can identify a bull or bear quiet by the price very slowly moving in a definite direction as it oscillates between the two Bollinger bands – when they are quite tight. The majority of the price action will fall in the half of the range that the price is trending.
How to trade it [bear]:
These market types, when they do occur, call for wider stop losses over the opposite side of the Bollinger band. Set profit targets just above the previous low and sell any rallies back above the middle Bollinger band.
How to trade it [bull]: Keep your stop-loss well beyond the opposite Bollinger Band, take profit just below the recent high and buy dips to below the middle Bollinger band.
Bull and bear normal
How to identify them:
A bull or bear normal market type can be identified when the price is trading in-between the mid and outer Bollinger band. Generally it will start when price closes over the Bollinger band in the direction of the trend. It typically finishes when the price closes below the mid Bollinger band.
How to trade it [bear]: Hold or add to your position by selling rallies. You will also get small periods of consolidation throughout the move where the Bollinger bands contract. You can use breakouts from these to establish or add to positions.
How to trade it [bull]: Hold or add to your position by buying dips. You will also get small periods of consolidation throughout the move where the Bollinger bands contract. You can use breakouts from these to establish or add to positions.
Bull and bear strong
How to identify it: This is the phase of the bull or bear market where the trend is moving strongly for you. You can identify this when the 3 period moving average is trending over the 7 period.
How to trade it: You can use the initial phase of the move to quickly scale-in to a larger position. Generally, if you’re going to do this, you’ll want to have a strong candle in your favour (an engulfing candle it works best). Later in the move, you want to keep holding your position.
Importantly, you want to take profit when the moving averages cross back over – you can always re-enter when they cross back again if you believe the move still has legs (or take partial profit as discussed above).
Bull and bear Fast
How to identify them:
Fast moving market types are common in Forex, and if you trade these the same way you trade other market types, you could end up leaving a helluva lot of profit on the table.
There are two ways to identify these market types:
- Look for strong candles that close over the outer Bollinger Band.
- If you get two or more closes over the outer Bollinger Band, you are in a fast market type.
How to trade it [bear]: Take profits quickly in fast market types. You can use a 0.5 x your risk (0.5R) trailing stop and/or look for a reversal candle pattern. You can also take profits if the price closed back inside the Bollinger Bands.
Bull and bear volatile
How to identify them: My definition of a volatile market type may differ here from previous work. I have found it more useful to categorise what I have previously called volatile market types as “fast market types”.
In Forex I now term bull and bear volatile market types as those that are in a trend, but experiencing deepish pull-backs towards the opposite (expanded) Bollinger Band. This is as the word “volatile” seems to better describe a market that is swinging around, than one that is solely heading in one direction (IMHO).
Watch for a close across the middle Bollinger Band (against the trend) to signal that a bull or bear volatile market type may be underway.
You will need to use some discretion as these are one of the more tricky market types to provide a clear definition for, but with practice you will know it when you see it.
Don’t get too worried; one of the reasons I call them volatile is because you can trade them the same way as a sideways volatile market type.
How to trade it: These market types are very often the precursor to a reversal, or to the formation of a sideways market type. They tend to follow fast market types, or form based on news (which you can plan for).
A bull or bear volatile market rarely continues for long – hopefully, you have had the opportunity to take profits on some of your position already.
Otherwise hunt for a reversal candlestick pattern in the direction of the trend to look to re-enter or add to your position. Preferably, you would want to see this off either a minor double top/bottom or support/resistance level (depending on the direction of your trade).
Once you get a close across the opposite Bollinger band altogether, you are no longer looking at the same market type. When this happens, you will need to reassess what is happening in front of you, and proceed accordingly.
How to identify it:
Sideways quiet market types can be identified by the price forming a range and the Bollinger Bands becoming very tight.
How to trade it: In these market types, you want to wait for a breakout to enter your position or, if you are already in a trade, breakouts from this market type make excellent places to add to your position.
How to identify it: During a sideways normal market type, the price enters a range, and the Bollinger bands contract. If you have trouble telling whether the market type is sideways normal or sideways quiet, look back on your chart and see how previous examples compare with the current market type.
How to trade it: Look to take profit on reversal candles off the edge if you are in a trade. If you are not in a trade, you can look to enter off the edges – preferably in the direction of the longer term trend.
How to identify it: The currency pair bounces around rapidly inside the range, while the Bollinger bands are expanded.
How to trade it: Look for reversal candles off the edge of the range. (And use a tight trailing stop on your position!)
How to identify it: Normally in response to news, you get an extreme amount of volatility as identified by two or more candles with long wicks and/ or bodies inside the range.
How to trade it: I have not done it for a couple of years, but buying short-term (5 minute) one touch binary options when they are cheap works well in this market type. If you are trading spot Forex only, go to a lower timeframe and trail your stops very tightly behind the price. You should prefer to stay out of this, unless you have a complete trading strategy designed for trading these markets.
What timeframes do market types work on?
Market types work across all timeframes. You will find some are more common on certain ones than others. In general: the lower the timeframe, the faster the market type will range, and the more often you will come across volatile market types.
Should you look at a higher timeframe to determine the market type, and then trade off the lower one?
Generally, you will watch the market type on the chart timeframe you are trading off, but it can be helpful to view a higher or lower timeframe to get some context. In addition, higher timeframe market types can be good “set-ups” for trades off lower timeframes.
What settings are the indicators you use on?
- Bollinger band: 2 Standard Deviations and 20 periods
- Moving average: a 7 period moving average and a 3 period moving average
How do you tell when a market type is going to change?
The price action, and upcoming news information, can provide signals that the market type could be about to change.
But when you trade what’s in front of you, you are not trying to predict the market. Rather, you are noticing what it currently is, and responding appropriately.
What to do if you can’t tell what the market type is?
Sometimes you just need to make a call on what you think it is, and run that approach. If it’s simply too tricky to tell, it might be wise to stay out until you can make a decision and back yourself confidently on it.
Market types provide a very useful framework to the trader, but learning how to identify them takes practice.
If you have any questions about market types, please comment below. Or, if you want to learn more, this is lesson 8 in the Advanced Forex Course for Smart Traders, which you can join for free.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.
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