In designing a trading strategy, we will start with the big picture and dig deeper into more detailed decisions of the strategy in making decision. In the beginning, we will assess what type of market we want to trade and what kind of trader we want to be. Then, we will end up with how to decide on exits, and how we manage our money and risk by putting stops.
Pick the Market Type
The first decision you have to make is what type of market action you want to trade. Generally, there are three types of markets, they are derived from three distinct chart patterns that appear when there is a shift in market action. Each market type can be characterized by specific price activity. You should make yourselves familiar with the charts to be able to identify different market pattern.
Pick the Market Type
The first decision you have to make is what type of market action you want to trade. Generally, there are three types of markets, they are derived from three distinct chart patterns that appear when there is a shift in market action. Each market type can be characterized by specific price activity. You should make yourselves familiar with the charts to be able to identify different market pattern.
The three market types are as follows.
1) Trending Market: A sustained large increase or decrease in price characterizes a trending market. If you decide to choose the trending market for your strategy. You are designing a trend-following strategy.
2) Volatile Market: A volatile market is characterized by sharp jumps in price. If you decide to choose the volatile market for your strategy. You are designing a volatility expansion strategy.
3) Directionless Market: A directionless market is characterized by smaller, insignificant up and down movements in price, with the general movement sideways. That's why it is usually called Sideways Market. If you decide to choose the directionless market for your strategy. You are designing a support & resistance strategy.
Although the picking of the market type may, on the surface, look like an easy decision. In fact, it is a difficult one because most new traders only think about profits. They simply try to pick the strategy that makes the most money. Unfortunately, focusing on the money is not the right decision.
Whether you are a new trader or an experienced trader, I would suggest you to use either a trend-following strategy or a volatility expansion strategy.
Why do I suggest that? What about the support & resistance strategy?
Either you choose a trending market, with the knowledge that you are going to have to trade through extended periods of drawdown in the directionless market, or you choose a volatility market that will give you extended periods of doing nothing while you wait for the next trade in volatility expansion strategy.
