Opening position

Market behavior

A market is basically in one of two states : Trending or Ranging. However it happens that price can range and trend in a same time too. This configuration is the hardest to trade.

- A trending market can be described as a market where prices make new highs or new lows at each bar. Look at the picture below : there are 2 downtrends. Price is usually outside Bollinger bands while the bands are widening (trend n°1) and is going in the same way as the MA20 (trend n°2).

- In a ranging market the price is swinging between upper and lower Bollinger bands limits or between a resistance and a support. The price will continue to swing.... with the bands staying parallel.... until a trend starts.On the picture below, there are 2 ranging zones in a global bullish trend. A ranging (or choppy) market can easily be traded but one must follow some basic rules which i will explain later.

If you are in a losing position in a trending market (i.e : you are short, the trend is bullish) the best advice is to cut your position fastly because your losses will substantially increase... add leverage (or news positions, it's the same thing) on a losing position in a trending market and you can be almost sure it will finish in a margin call.

So which is the best market to trade? Obviously the trending one. Because if you trade with the trend and your position is a losing one, it means that the market changes into a ranging one thus it will be easier to close your position with a small loss because the price will make one or more swing near your entry price before going away.

What are the best indicators to trade with the trend?

Simpliest is the best!!! Use indicators like Moving Averages or Ehler's Laguerre Filter, Put several MAs on a given timeframe (TF) to represent the behavior of the TF and of the longer TFs. Always trade in the same direction of your trending indicators in a given TF. Wait for them to be properly aligned.

Looking for retracements to enter the market

The best entry points are the retracements,when the market is trending. . Look again at gbpusd chart : one can see two nice retracements in trend n°2 : a first one the 4th between 10 am and 2 pm and a second one the 5th between 10 am and 2 pm.

One must seek these patterns and enter the market while in them. To detect these retracements and use them there is a wonderful indicator, the Parabolic Stop And Reverse (noted PSAR or SAR).

You will see that :

- In strong bullish trends the SAR is under the price and acts as a support for the price. When price is retracing, the SAR is broken and become a resistance. The trend will continue by breaking this SAR resistance.

- In strong bearish trends the SAR is above the price and acts as a resistance for the price. When price is retracing, the SAR is broken and become a support. The trend will continue by breaking this SAR support. Look at the eurusd chart under. There is a nice bullish trend going on! And several good times to take long positions, ending with nice profits!