You cannot force yourself to run if you still can’t walk. You cannot go to war without a plan to win over your opponents. This can also be applied to Forex trading. You can’t just put your money at risk without testing the tides. Just like when going to war, you need a situation report with regards to the trading environment. What this implies is that you need to know and understand the environment you are in before deciding on the strategy that you will use.
There are a lot of traders nowadays who cry because their system is awful. Yes, there can be times when the system truly sucks. But most of the time, the system is really profitable, but it is being handled in a totally wrong environment.
Coming Up With a Strategy
Those professional and seasoned traders would always come up with an idea or an appropriate strategy that they can use on the current market where they are trading. Just like with a coach coming up with different ways to counter the strategy of the opponent, a trader must also be aware of the right strategy to use in the different trading environments. Because when you know the market environment that you are in, you will be able to choose a strategy which can be trend-based for trending markets or range-bound strategy for a ranging market.
Have No Fear When Choosing a Strategy
Fortunately, the Forex market is capable of providing a lot of ranging and trending opportunities throughout various time frames where they can implement these strategies. Upon knowing the most appropriate strategy to use, finding the most appropriate indicator is a piece of cake. For example, you can use Fibs and trend lines when you are in a trending market while support and resistance levels and pivot points are very useful for a ranging market.
Before you spot those opportunities, you need to be able to know the trading environment that you are in. There are three states of the market which are divided into three scenarios.
- Trending Up
- Trending Down
When traders trade with a trend-based strategy, they mostly pick those major currencies and those currencies using dollars since these pairs trend and become more liquid compared to others. Liquidity plays an important factor in a trend-based strategy. The more liquid the currency pair can become, the more volatility you can expect.
A range-bound market, on the other hand, is where a price bounces between low price and high price. For the high price, it acts as a major resistance level, making the price unable to break through. As for low prices, it acts as a major support level which is also making the prices unable to break in as well.
The movement of the market can be classified as sideways, horizontal, and ranging. Sometimes, it is referred to as the ‘choppy market’. This choppy market is the complete opposite of the trending market. The choppy market offers no clear direction and the price simply ‘chops up and down’ and the trades are made in a narrow range.