We all know how to drive a car. But have you driven your car or your jeep in mountains? If you have, you know that driving in mountains require a totally different style of driving as compared to driving on a level road. Or have you been ever caught in heavy traffic in the city? Whatever, the purpose is to tell that drive a car requires a different style at different times. In the same way, when you trade, you need to adopt your trading style in accordance with the market conditions. Market conditions vary and your trading style should vary as well!
What this means is that you need to adopt an appropriate trading style in accordance with the market conditions. Now there are three basic types of market conditions: Trending currency pairs have a definite direction. Range bound currency pairs bounce between the support and resistance levels. Consolidating currency pairs are bound in a narrow consolidating area.
Each market condition requires its own appropriate technique. What is appropriate for the trending market may not be appropriate for a range bound or a consolidating market. Now when a market is trending, it has chosen a clear direction. History shows that trends in the forex market may last for years.
Once you have clearly spotted a trend, it is easy to trade one. In case of a trending market, the currency pair has a clear direction. What this means is that there is very less tendency for the stop loss to get triggered as the currency pair is moving in an established direction.
In contrast to a trending market, in a range bound market, the currency pair price action is bouncing back and forth between the support and resistance. The price action always comes back to the starting point. What this means is that the trading technique for a range bound market is totally different than a trending market.
You can identify a trending market with the help of a trendline. Now drawing a trendline is always subjective. Ask five traders to draw a trendline and all may come up with a slightly different trendline. Nevertheless, a trendline can show you the direction of a market by simply drawing a line.
You can also use the ADX ( Average Directional Index) Indicator. If the reading on the ADX chart is above 35, it means that the market is in a strong trend. However, ADX does not show the direction of the trend!
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