Gaining Market Perspective to be a Better Trader

Every morning traders wake up looking at their charts in an effort to find opportunities. They are faced with making decisions on whether to go long or short the particular markets they trade. This can be challenging as the markets are in a constant state of motion. One day up, the next down, and on some days the market can change direction intraday. So, with markets constantly changing it’s important that a trader gain the right perspective to start every day.

One way to do that is to look at the big picture. This means looking at daily, weekly or monthly charts. The objective here is to identify the environment a trader is going to encounter. This will enable them to be better prepared to tackle the day’s trading challenges. If you think about it, the markets can only be in two types of environments: trending or in a range (sideways market).

A common misconception many traders have is that they think the markets tend to trend more often than they’re in a range. Regression studies have actually shown that this not the case. Markets generally have larger spells were they are range bound. In looking at larger timeframe trends (weekly and monthly) in the stock index futures or currencies, what you will find is that these markets spend weeks, sometimes months going sideways before they resume the next leg of the trend. Look at the charts and you will see the sideways market for yourself. If this is indeed the case, then traders need to know where the lowest risk trades are found in this environment.

Recently the Euro Currency futures contract has been in a large range for about a month. We can see this on the daily chart below.

In this type of environment the lowest risk, highest probability trades would be at the top and bottom of the range. In other words, look to buy at the bottom of the range and short as we near the top of the range.

Implementing this strategy, I recently took a trade look in the Euro Futures near the lower part of the range. As we can see from the chart, I took the entry at the origin of a strong move in price (demand) and achieved the profit target right below a supply zone identified by the strong move lower.

Also of note is that the demand zone was located near the lower extremity of the range.

In the next example, we see the Nasdaq mini futures also in a daily range.

Similarly, an opportunity at the lower part of the sideways market presented itself and I took that trade as well. As we can see from the lower chart, the demand zone (highlighted by the two horizontal lines) was the entry and the target was achieved at the opposing level of supply.

As we can see, having the right perspective can assist us in finding low risk trading opportunities. This requires learning a rules based strategy that is consistent in its approach. In this missive, we focused on range-bound or sideways markets. In the next one, we’ll tackle trending markets and how to trade those. Stay tuned…

Until next time, I hope everyone has a great week.

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