Before diving in and making a forex trade, it is always worth taking a wider view of the market environment that you will be trading in. This can help to inform the strategies that you use, as some are more effective in one type of market environment than another.
There are lots of potentially profitable trading systems out there. The key is knowing when to employ them. For example, a ‘scalping’ strategy can work well in ranging markets, but can come undone in trending markets, which is why it is most often employed as a ranging strategy.
Of course, no system is perfect – some are simply better than others – but in many cases it is the market environment that will determine how successful it is in practice. A good strategy employed in the wrong market conditions will, in most cases, lead to an increased number of losing trades. By matching up your analysis techniques and trading strategies to the market conditions you observe, you can make a big difference to your winning percentages.
So, for example, if the market has been range-bound and you notice some signs that it is likely to start trending, you might get out the Fibonacci levels and start looking for retracements. It’s all about knowing how to read the market, and there are a number of tools and techniques out there that can help you to do this.
The Forex market: an ever-changing sea
One of the constants of the forex market, and markets in general, is that the conditions are always changing. This means that, even if you have a great trending strategy worked out and the conditions just aren’t right for it, you can always use it at a later date. By having a few different tools and tactics ‘in the bank’, you can whip them out whenever the momentum of the market is changing. .
In a trending market, for instance, you might be more inclined to use trend lines and Fibonacci retracements for analysis purposes, while in a ranging market you might be better using tools such as support and resistance levels and pivot points.
In this series, we shall be looking at the differences between trending and ranging markets, and how to adapt your approach to each potential scenario. We shall also be showing you how market environment analysis can be used to differentiate between retracements and reversals.