All markets have 3 distinct directions in which price can move — Up, Down and Sideways. Within those 3 directions there will be 2 other elements at play Time & Volatility.
As a trader, knowing the dynamics at play of your chosen market(s) and also of your own Trading Psychology will enable you to choose a trading style or a number of trading styles that suit you and the outcomes you are trying to achieve.
Market Direction Up (Long)
By this direction the intention is that the market is consistently trending upwards. A classic way of taking advantage of this type of trending market is employing a trend following style which attempts to profit from the ongoing trend. This type of style would employ an exit plan that will exit the trade when the trend starts to change. To signal the reason to exit a method would be used to trail behind the trend by a given distance and then sell once that trail is broken (known as a trailing stop). This style usually has trades that will last quiet some-time; days to weeks perhaps and would suit you if you didn’t want to be market watching every minute of the day. A trader using this style would look at daily charts to ensure his actions were in line with the trading outcome. Below you can see BTC/$ chart in a confirmed trend with a trend following trade overlaid as an example.
Market Direction Down (Short)
Conversely to the up trending example, markets can get into confirmed downward trends and if the chosen market allows, these trends can be shorted or sold so that a trader can profit from a trend following style downwards. This type of trade style is less popular than the Long example and characterised generally by the trend lasting less time and being more volatile.
Trend Following Characteristics
These styles of trading will last days as opposed to minutes / hours and work well when defined trends are in place. As you will see on the example charts they employ a trailing exit methodology so a lot of ‘paper profit’ is lost as the exit condition means the market must reverse its trend to signal a reason to exit (paper profit being the difference between the top or bottom of the trend relative to the actual exit price). To counter this ‘lost profit’ secondary exit reasons can be employed such as when the price hits a pre-determined high or low, but by doing this the trader risks exiting mid or early in the trend! Yes, trading is very multi-dimensional and not as easy as the often heard cry ‘Buy low sell high.’
Market Direction Sideways
Sideways price action essentially means the market is not in a defined up or down trend but over time tracking sideways. However as you can see in the example BTC/$ chart below although from the start point to the end point price has not moved a great deal (stayed around $650) on its journey between those 2 points it has swung up and down significantly. So a trend trader would not be involved in this type of market.
Short Term Trading
These ‘swings’ in price (which occur all the time regardless if a market is moving up down or sideways) offer the shorter term and more active trader plenty of trading opportunities. This is price Volatility in action, whereby the price of a given market moves either up or down quickly. Trading these short term conditions is a lot more active than the trend styles and the trader will look at market conditions in much shorter timeframes perhaps hourly or minute charts and trades will last minutes / hours or a few days maximum.
The chart below shows an example of short term trading in a volatile period of BTC/$. Each candle represents 30 minutes. Price has trended down quickly from a stable area, a bottom in the down move is established and price swings back upwards again quickly with volatility. The short term trader is looking to profit on that price swing moving back up to the stable point. Trade entry is once the swing establishes and exiting at the pre-determined profit target.
Markets offer trading opportunities all the time, Up, Down or Sideways with the added conditions of Volatility and Time. We have only covered a few examples in this article. There are many more trading styles that can be employed by a trader and in future blogs we will focus on some of those in more detail.
It is important also to remember that a trader can have 3 directions to trade, Long, Short or No Position (sitting on the sidelines).
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