Adapting Your Trading to Market Conditions

This is probably a more advanced article in relation to trading content as to be able to read market conditions and compare them with previous market conditions you need to have gained a certain level of experience in the markets. However, regardless of the level of experience you have in the markets this article will aim to make you aware that the market does go through different conditions and as traders we need to learn how to adapt our trading to the conditions we find ourselves in.

Recently we have noticed that market conditions aren’t so conducive to long lasting trends right across US Equity’s, Commodities and Forex. We seem to be getting allot of nice strong moves one day however more often than not these moves will just as quickly reverse the next day signaling an end to the overall momentum of the move. We are not saying that there have been no long lasting trends recently, it’s just that the majority of the charts we follow seem to have been getting the jitters. As professional traders we need to recognize this market behavior early and adjust our trading accordingly.  

One of the major changes we would make in this type of circumstance is to reign in our targets. This means we wouldn’t necessarily be looking for those long runners where we would be looking to hold trades over the long run to gain a higher reward to risk ratio. Instead we would be setting allot more conservative targets and getting out of our full position at these levels to avoid the market then turning around and stopping us out. So we would instead be looking to gain a lower reward to risk level on a trade but in turn we would be looking for a higher win rate to balance that off. This will keep us in the market for shorter periods of time while the moves are occurring and hopefully it will have us out before those moves reverse. 

Another aspect of our trading that we would need to look at would be whether we concentrate more on swing trading or intraday trading. In market conditions where price moves aren’t continuing for extended periods of time it’s likely that you would be better off concentrating on intraday type trading as you can be in an out of the product while the move lasts. In these type of market conditions the moves can be short lived so it’s easier to get your targets hit on an intraday basis rather than a swing trading basis.

A prime example of what we have discussed above setup in the markets yesterday. The screenshot below shows a Trend Flow strategy setup short on the 120 minute chart of AUDNZD. Usually we might look to make a play for a larger target on this however due to the market conditions we decided to just go for a 1:1 risk to reward trade. We were looking to gain an entry short one pip below the low of the red candle and a stop was placed one pip above the swing high just created.

In the screenshot below you will see the outcome of the 1:1 target reached. Instead of price continuing on in its trend to make another lower low, what we saw was price has subsequently retraced strongly and instead formed a higher high. This is exactly the type of market behavior that we need to adjust our trading for.

It’s important to continue to monitor the market very closely as the conditions can continue to change into another mode just as quickly as they arrived. If we start to notice that the trades we are getting into are continuing to move strongly in the direction of the trend, then this could be a sure sign that conditions have changed once again. We would then make a few tweaks to our trading to make sure that we can start to take advantage of some possible bigger moves.

Happy Trading!

Regards,
The TWP Team