Understanding The Market Before Trading

Posted by on Feb 19, 2016 in Blog

While most of my teachings are in regards to trading with order flow, I really believe that one must have a good understanding of the market before committing their money to the markets. These 5 pieces of advice will help any trader, whether or not they are followers of order flow.

One valuable thing that you can ever learn during the course of your trading is this – the market has character, and if you have developed a good sense of market evaluation, you would be able to use this to your advantage. Here are some of the 5 of the most vital pieces of trading advice that you can get If you are about to enter a trade:

Do not trade a dull market.

If there is one thing that trading experts have come to figure out when it comes to trading, it would be that trading a dull market is not a very good idea. This is because when the market is in its vacation mode, or not doing anything extraordinary, traders have higher risks of being in a position where the market may make a sudden move against them on very little volume.

There could be exceptions, but in general, trading in a dull market isn’t recommended. Most day traders are generally relying on technical indicators to help them understand the trend. Since in a dull market a high portion of traders are considered to be on “vacation” or not involved in the market. If you are expecting that the characteristics of a large trading population is applicable to a smaller population is what expert traders would refer to as a ‘treacherous’ idea.

There are times when trading should be off the table.

During times when the market lacks liquidity or it has excessive volatility, you should know that trading should not be pursued.

When there is liquidity present, this means that the trading population is competing for a price. With a larger trading population, it is more likely that the price will move in a manner that will conform to your expectations based on following the order flow. When there is lack of liquidity, anyone can enter the market at an unexpected time and jam it as they please. There is simply nothing you can do to stop this.

On the other hand, when the market gets excessive volatility, the difference between what is bid and what is offered gets wider or the volumes on the bid and offer get very small. The reason why the difference gets so wide or the volumes get very small is that the traders do not want to trade while the market is in its insane phase. During periods of excessive volatility, traders generally don’t want to stick their neck out only to have it chopped off. So when the pit looks like it doesn’t want to trade, then neither should you. If this happens to the market, just close your position and set trading aside.

Understand the different types of market.

Generally, there are at least three types of markets. Aside from the previously mentioned up and down markets, there is also the range bound market. It is still worth noting though, that the time period of the trading day plays an important role in any market including the range bound market. Lunch time is a perfect example. There will be times of the day when there are slightly less participants and often times when there are less participants, the market may become range bound.

Patterns are always present.

Patterns for up and down markets are always present, only that there is one that is more dominant than the other. For example, in an up market, it is quite easy to get one sell signal after the other and just be stopped out time after time. So, as a logical step, do select trades with the trend.

Entering a losing trade is always easier but know where you will place your stop before entering your trade.

Here’s a sample scenario: Let us say the market is moving up and you are trying to get in. Then, it’s beginning to pull back so you determine you want to get in on this pull back and then place a limit order to buy to get in. The market then pulls back to a tick above your order, and then it bursts to the upside. You were never able to get in so you try to chase it up by starting to move your bid up, but it just keeps on moving away and you miss the trade completely. So, the next time you see the market acting like this, you place your bid a little more aggressively to ensure you get in. The market goes down, you get in, and it will keep sliding down, down, then down to the day’s new low. The trade was never in your favor and you had to rush down to exit. This is something that happens often, and the advice that is given when it comes to this scenario is to place your stops as soon as you can after entering the trade. For some traders it is probably prudent to place their stop before they enter into the trade. If the trade is bad, it usually becomes bad right away. So when you place your stop initially, you wouldn’t have to wait until you are filled to get your stop in the market.

Happy Trading.

Mike

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