Today I want to discuss a very important subject that is crucial to your trading success: identifying trend and range periods.
Your entire trading strategy depends on the market condition: in strongly-trending markets we will look for tactical places to join the trend, and in ranging markets we will look for reversal signals at the market bottoms and tops. In this article you will discover the most consistent ways to separate trending and ranging periods, and how to use it to improve your trading.
Let’s start with some universal trading stats: the market trends just 20% of the time. In the rest of the time the market is in a ranging period: fluctuating from support and resistance levels with little direction.
This is why you must know how to separate between the two and adapt your trading strategy to the current market condition.
One of the easiest ways to identifying range and trending periods is by using a 20-period moving average.
The angle of the moving average helps us determine the strength of the trend: If the moving average is flat, it means that price is in a range and if the moving average is pointing to either direction it means that price is trending.
After identifying the current market condition, it is time to determine which trading methods work in trending markets, and which work in ranging markets.
In trending markets we recommend trading:
Bounces on Moving Averages
Continuation Patterns: Flag, Pennant, etc
Trend-Following Indicators: MACD, Alligator, etc
Bounces on trend lines
Basically any trading system that is trading with the momentum is good to trade in trending markets.
In ranging periods we will focus on trading set-ups that are trading counter-trend, predicting a reversal.