To be successful, forex traders need to be sure their strategy fits the current market conditions, writes James Stanley of DailyFX.com, reviewing the qualities and key considerations when trading a range, trend, or breakout.
Before we build a strategy, we first need to get comfortable with an inevitable fact: no trading strategy will work all the time.
Based on fundamentals, technicals, and a whole flurry of other factors (such as future news events), markets will exhibit distinct "flavors," or conditions, at various times.
These various "flavors" can greatly determine whether or not our strategies will be successful. If we are trading a range strategy in a trending market, the results can be disastrous and potentially very costly.
Often, it behooves us to try to trade a ranging strategy when markets are showing us range-bound behaviors. And if the market is volatile and moving quickly, then we often want to be trading a breakout-related strategy.
It's important to keep this in mind as we build our strategies. As humans, we often can't help but strive for perfection. Unfortunately, as traders, this can be a fatal mistake, as perfection is not only impossible, but its pursuit can carry costly repercussions. Building a strategy is the art of concentrating on net results, and focusing our strategies on market conditions specifically for which they are designed can help traders focus on producing the strongest net results.
So, before we even begin to design the strategy, we first have to answer an important question: What market condition do I want to design this strategy for?
How to Pick a Condition
Market conditions can be split into three groups: ranges, breakouts, and trends; each with a different idea of when the best time to buy or sell might be.
Ranges are highlighted by adherence to a channel of prices. During ranging market conditions, prices will respect the boundaries of support and resistance, and it often behooves traders to employ the age-old mantra of "Buy low, sell high."
Ranges can be common in quiet markets, or even in congested periods when traders don't have enough information to move price higher above resistance or lower below support.
The chart below will illustrate a range, as indicated with price action, using the mechanism we outlined in Swing Trading the Forex Market.
Unfortunately, ranges don't last forever. Most of the time, a fresh piece of news hits the market and traders rush to bid price higher or drive price lower as that news is factored into the environment. These fast markets can be highlighted by large, volatile, and unpredictable moves.
This is how ranges become breakouts: the market environment receives a catalyst that pushes price beyond the previously defined boundaries of support and resistance.
NEXT PAGE: Trading Breakouts and Trending Market Conditions