Lesson 1: Why You Need to Master the Trading Environment

Do you know what separates traders from gamblers? It’s the preparation they do before diving into the market. 

A gambler rushes blindly to invest (or just they thought) their money, aiming to hit the jackpot in a snap. 

A trader gets the pulse of the market before investing their money. They always monitor and familiarize themselves with the trading environment to avoid getting shocked after taking a market position. 

Lesson Highlights

• A trading environment is an essential factor that traders must consider when strategizing a trade.
• Common market environments include trending, range-bound, volatile, and quiet markets.
• For short-term traders, a volatile environment is profitable. During a volatile market, the market experiences high pip-value changes over a short period.

What is Trading Environment 

As in warfare, you must also get a situation report on the trading environment you’re in. By getting this report, you get to see what type of environment you’ll subject your position to.  

When you’re trading forex, it’s common to see your strategy fail. Does that mean that you’re just simply bad at trading?  

Well, that’s one thing. But a great factor to consider is the type of environment you’re in. Your strategy may be profitable, but only in some environments. If you use the strategy to the wrong one, you’ll surely waste your time, effort, and investment.  

So yes, your trading strategy MUST and SHOULD always be in accordance with the market environment. You should always note that a strategy is not a one-size-fits-all type of thing. A strategy that works with one environment may potentially not work on other environments.  

For your reference, here are the common types of market you may expect when trading forex; 

1. Trending Markets: The price is consistently moving in one direction, either upward or downward.  
2. Range-Bound Markets: The price moves in a defined channel or range. This market movement has no clear trend  
3. Volatile Markets: The price is snapping from one direction to another direction in a span of short period. In this market, traders experience rapid and significant price movement.  
4. Quiet Markets: The price has slowed and limited price movement.   
5. Calm Markets: Unlike a quiet market, a calm market has a stable movement but with little market significant. 
6. Liquid Markets: The price movement is highly dependent on the high volume of trading activities. With this market demand, traders can enjoy tight bid-ask spreads.  
7. Illiquid Markets: Contrary to the liquid market, price movements during illiquid markets are significantly low because of limited trading volume.  

What is Trending Market 

A trending market essentially suggests that the asset price is generally moving in one direction. Essentially, this type of market consistently closes either higher or lower than its previous record.  

To note a trend, the stuff you need to look out are; 

1. Higher highs and higher lows for uptrend 
2. Lower highs and lower lows for downtrend 

Basically, an upward trending market is a market that may fluctuate up and down but closes periodically higher. Meanwhile, a downward trending market closes periodically lower regardless of the range movement.  

When trading a trending market, you need to utilize a trend-based strategy. Here are the best trading tools when you trade the market trend; 

1. Moving Averages (MAs) 
2. Trend Lines 
3. Momentum Indicators 
4. Chart Patterns 

What is a Range-Bound Market 

A range-bound market describes a situation where the price of an asset fluctuates within a specific price range for a period. However, these movements happen without making a significant upward or downward trend.  

In a range-bound market, the price tends to bounce between defined levels of support and resistance, creating a trading range or a sideways trend. 

When there’s no trending market, how would you profit from this?  

Range-bound markets offer trading opportunities for those who aim to profit from divergence or those who buy and sell near the support and resistance levels. Traders may use technical analysis tools such as trendlines, moving averages, and oscillators to identify potential entry and exit points within the trading range.