Tuning Your Strategy to Market Conditions

One of the major aspects of trading that I try to get across in every EU Trade Room session is that the doing your daily preparation in order to assess what the markets are most likely to do next can give you a great starting point from which you can decide how to apply your strategy. Understanding what the current market conditions are and are likely to be, can help you to identify the types of context that would likely give your strategy a greater chance of success.

Pending News & Technical Context

Knowing when there are big events and factoring this in to your daily plan will help you to know when to look out for sideways action. When there’s big economic data due out in a couple of days or there’s big fundamental news out that has a high potential to significantly move markets, the higher timeframe players who move the markets are less likely to want to commit themselves to sizable positions and so there’s an elevated probability of balance/range.

Recognizing this, you can see that taking longs near the highs of the short-term range or shorts near the low is unlikely to prove profitable. However, as the range extremes are approached, any sort of extension failure of the short-term range can give you the confidence to take signals in the opposite direction.

Price Action

So what kind of price action could a trader lean on to increase the probability of taking a reversion type winning trade? Perhaps before this question, it’s necessary to ask where the price action need to take place for it to be meaningful. Although in the case of a range-bound market the obvious place to look would be at the extremes, there are other locations that can support the idea that balance is likely to persist. The key is to look for a level towards one end of the range.

Once you have a good location, it’s not too difficult to use simple price action to identify when sufficient opposing trading activity has entered the market to at least temporarily halt the move towards an extreme. If you’re not taking this as an entry signal in itself, i.e. you’re using it as a prerequisite to taking an entry signal, using a lower high/lower low could suffice.

FTSE on Wednesday

The FTSE on Wednesday was a great example of there being a good chance of balance. There had been a strong move down the prior two days because of news relating to Greece. However, attention was starting to shift to the Greek referendum due on the coming Sunday and the US Jobs Report on Thursday, coming out a day early due to the holiday.

FTSE Strong Selling Chart

There had already been a decent low put in on Tuesday and the market was looking like it’d open higher at the top end of the prior session’s range. These were early signs on top of the upcoming news, that the market may not be as likely to extend lower on Wednesday. Of course, an unexpected change in the Greece situation or any other major unforeseen news could change everything, but all things being equal, the key was to see what the market would do on a test lower.

The first major test lower came in at what was the swing high of the prior session’s cash close, very close to the 61.8% retracement between the open and prior session’s close and the psychological level of 6500.00. Confluence of factors always helps and here we had three readily identifiable reasons for this area being important.

Small Extension Lower Chart

The FTSE then made a new session high before retracing all the way back down to retest the low. Because it only broke it by 2 ticks, this qualified as a failed auction. If it was only able to take out the low by a tick or two, the chances are that selling was running out of steam and sellers were getting trapped and/or buyers were still present. Couple this with the hypothesis of being balanced (remaining in the current range at least) and you can see how the next long signal which Trend Jumper generated, would have been a great one to take.

Market Conditions

By figuring out what you might expect each day based on market conditions, you’re far better equipped to pinpoint the setups that fit in with market context. Having great entry systems is one thing, knowing when to use them is another.

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