Markets exhibit different conditions at various times based on fundamentals, technicals and a whole lot of other factors. These distinct market conditions will greatly determine whether or not the trading strategies we employ will be successful. Focusing our strategies on market conditions for which they are designed can help traders to produce the strongest ‘net’ results. We say ‘net’ only because of the fact that not all trades are successful. Market conditions can be broken down into three simple groups Ranges, Breakouts and Trends. Trading strategies that need to be implemented in each of these market conditions are different, as to when is the best time to buy or sell maybe.
Ranges are identified as they adhere to a ‘Channel’ of prices. In such ranges, prices usually respect the boundaries of supports and resistances. Ranges usually appear in congested periods where traders don’t have enough information to move prices higher above resistances or lower below supports. The best strategy to use in such ‘Ranges’ would be to Buy Low & Sell High.
As we have discussed above, Ranges don’t last forever. Some catalyst in the form of some news or event, triggers traders into pushing the price higher or drive the prices beyond the previously defined boundaries of Supports and Resistances. This is the way Ranges over a period of time transform into Breakouts. The strategy of trading Breakouts is to enter trades in anticipation of those breakouts from supports and resistances. But it is very important to keep in mind that no one knows when or how the supports or resistances are broken and also there will always be uncertainty if the breakout will continue driving in that direction. However, there are other factors, including technical indicators that could adjust for this uncertainty. A successful Breakout Trade can lead to considerable run in prices over extended periods of time but one should always manage risks associated with Breakout Trades by using appropriate Stop Losses as there will always be false breakouts.
Once a major support or resistance is broken the stock usually could go on to trend for an extended period of time. Trend traders usually wait for major levels of support or resistance to break so that they can be clearly identified on the charts. Trend traders use the same strategy as Range traders, Buy Low-Sell High, only now the Trend traders also have the advantage of applying the positive or negative bias of the broader trend. Simply put, Down Trends are highlighted by lower lows and lower highs, while Up Trends are accentuated by higher lows and higher highs. One has to keep in mind that future price action, like any future event is unpredictable especially when using past price information. However, traders can attempt to identify the trend based on the assumption that price movement in one direction has a bias towards that direction which would continue. If price is in a downtrend, Trend Traders are better placed to initiate short positions and if the price is in an uptrend Trend Traders can make profitable trades by initiating long positions.