There are some strategies that do use both types of indicators simultaneously, usually on multiple time frames. That’s beyond the scope of this article, but here are some ideas to help ensure your charts are properly attired for the market you’ve chosen to analyze.
A trending market is one that prices move strongly in one direction, either up or down. The easiest way to visualize this price pattern is by drawing a line that follows the slope of the prices. Another hallmark of a trending market is the steady move to new highs and higher lows. Conversely, in a down trending market prices would be making lower lows and lower highs.
You need to be able to identify whether you are in a trending market or a trading market. The reason you need to be able to identify which of these two types of markets you are in is because each has its own set of trading rules.
Trending Market
In an upward trending market, the strategy of buy high and sell even higher works well. Stocks that have broken their 52 week high are good buys especially if they are supported by increasing volume as the stock trends higher.
In a trending market, you buy strong uptrending stocks in strong uptrending sectors. As a result, you can let your winners ride and gains can be large.
Trading Market
In a trading market, the strategy of buy high and sell even higher doesn't work. In fact, if you use this trend trading strategy in a trading market, you're more likely to buy high and sell lower. Stocks that are at their 52 week highs are not good buys and are likely to take swing moves down within a trading range.
In a trading market, you buy stocks that have been down for at least 3 consecutive days and you want to buy them near the lower end of the trading range. When they climb to the upper end of the trading range, you have to sell and take profits. As a result, gains are often smaller depending on the volatility of the stock and the trading range channel.
In a trading market, the stochastic, RSI, and StochRSI indicators trump all others. These indicators are better suited for a trading market than a trending market and so should have more weighting in your analysis.
How Can You Tell What Market You Are In?
You can tell what market you are in by price action. If your trending strategy of buy high and sell even higher stops working, that's a good clue that you could be transitioning into a trading market. By stops working I mean that you buy high and within a day or two the market reverses on you and it goes all the way down and hits your stop, that's a good clue that the market could be transitioning into a trading market. If this continues happening to you trade after trade and you draw down your account too much, then you can bet we are in a trading market.
If your range trading strategy of buying near the lower end of the channel and selling near the top stops working, that's a good clue that you could be transitioning into a trending market. By stops working I mean that if you buy at the lower end of the trading range and sell at the top, but the market keeps on going and you realize that you should have just held the stock longer instead of selling, that's a good clue that the market could be transitioning into a trending market. If this continues happening to you trade after trade and you realize that you are always selling too early, then you can bet we are in a trending market.
There's a better way to tell what type of market you are in than having a string of losses. In this video I'll show you exactly what a trending versus a trading market looks like, what technical indicator will tell you what type of market you are in, and how you need to adjust your trading strategy. For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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