How Does It React in Different Market Environments

Different markets will react differently under the same conditions. For example in a range bound market one stock may constantly hit the support and resistance areas, while another may just float around aimlessly. Some markets are textbook examples of trend following, with regular size retracements and can be traded with much clearer signals and safer stop areas. I remember years ago that crude oil was stuck in a 2-dollar range from $18 to $20 for a long time, and it moved much differently when it was in that range than when it broke out and started trending. In an uptrend-ing market it tended to rally regardless of whether it opened weak or not.

While it was range bound though, it tended to close the morning gap almost all the time and then trade aimlessly the rest of the day.


Let's forget about the peculiarities of individual stocks, but let's look at the big picture of where a stock is. When you trade, you need to know where in time you are. Some traders have blinders on when trading and forget to see where a market is in its long-term picture. Before you make a trade you need to know what type of market it is because markets will react differently in different conditions. You should be looking at charts in multiple time frames to get both a short- and long-term picture of what the market is doing to help determine if the market is trending, choppy, range bound, and so on. You also need to know what the general direction of the market is. You may also want to be using indicators to help you determine where the current market is in relationship to the big picture. Once you know all these things you can make smarter trading decisions.

For example, is the market in a long-term rally but has currently surged and moved too far off its trend line and therefore due for a retracement before going back up? Is it near the support of a range bound, choppy market with clear support and resistance levels? Has it recently broken out of a choppy market? Is it in a position where a possible reversal is looming?

Once you can pinpoint where a market is and know all of its levels you can start planning trades with much less of a gambling factor than if you were just looking at a small amount of data. Good traders will use different technical indicators and systems depending on the market conditions. Their game plan will vary according to where the market is versus its long-term history. They will be able to make smarter decisions as to where to get in and out as the picture gets clearer. All this in turn will make them better traders.


The better you know your stuff the better your chances of surviving are. It does require extra work learning everything you can about the markets you trade, but you will only be a better trader by doing so. Some of the things I mentioned you will only gain knowledge of through time by watching markets day in and day out. If you are lucky and have experienced traders who you work with, you may be able to learn faster. Just don't rush things and expect to know how the markets will react to every piece of news disseminated out there. And don't get stubborn about what you think should happen. Remember the markets are always right, and they will tell you where they should be—not the other way around.

When I was studying for my SATs I learned the word "parsimonious." Twenty-five years later, I don't think I had ever used it, until this sentence. Yes, it has nothing to do with trading but it was a thought I had while I was rereading these closing thoughts so I figure I'd share it with you.


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