Pinpoint Favorable Trading Opportunities: A Market Context Checklist

Having spoken to many traders over the years, one thing is clear to me – perhaps one of the most elusive concepts to fully grasp is that of market context.

If anyone is reading this and is unsure of what I’m saying, let me elaborate a little.

Context in relation to trading comes down to what the market is doing and how it’s doing it. Context can therefore help you to assess trading setups and identify new ones.

Not complex

A very basic level of context might be that a market is strongly trending up and looks likely to continue to do so. It may in this case therefore, be more favorable to look for opportunities to go long that fit in with your trade plan.

I’d like to suggest a simple context checklist that you might wish to use and add to. This could be useful in identifying forex pairs or stocks that are currently trading in a manner that might fit in with your plan. It might also be beneficial for day trading in order to tell you when it would be a good idea to press ahead and when to back off a little.

Top down timeframes

The first thing I’d say is that it’s really important to align yourself with the higher timeframe. It’s easy to become blinkered and therefore miss the key market signposts for when bigger market-moving activity is likely to come in, if you’re only ever looking at a chart set to the timeframe that you trade. By routinely assessing context across several timeframes, you are forcing yourself to maintain a constant awareness of what phase the market auction is currently in.

So the next question is of which timeframes to look at outside of your primary periodicity. I would suggest that you should look at least two higher timeframes and probably three. However, more than this isn’t likely to be particularly beneficial and is will probably only serve to unnecessarily increase your workloads. For intraday trading I would suggest at least assessing context on a daily and a 60min chart. If you believe it would be helpful, you could also look at a weekly chart. If you’re swing trading, I’d suggest a weekly and a daily chart, with the additional option of looking at a monthly chart.

Simple Market Context Checklist

Some of this may be a little subjective and unfortunately, this is often why people struggle to grasp market context. However, with a bit of practice it becomes easier over time.

 

Context Rating Key Price Levels
Balanced (range) strong/moderate/weak
Trending (directional) strong/moderate/weak
Price volatility strong/moderate/weak
Buying price action strong/moderate/weak
Selling price action strong/moderate/weak
Rejections higher (selling high) strong/moderate/weak
Rejections lower (buying low) strong/moderate/weak
Poor levels higher (where market might break) weak/moderate/absent
Poor levels lower (where market might break) weak/moderate/absent
Key volume buying/neutral/selling

 

As you can see, it’s doesn’t take a great deal of effort to assess the current longer-term context in the market. It may be something you wish to do every single day, or it may be something that you find is only necessary to complete a couple of times per week. Either way, if you have some idea of market context you will have a competitive advantage over many other traders out there.

Trade well.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.