The 4 Market Conditions
Sometimes in trading we get ourselves into sticky situations by not being aware of the daily market conditions . The following are the 4 Market Conditions:
- Stabile & Quiet
- Stabile & Volatile
- Trending & Quiet
- Trending & Volatile
During the stabile periods, the market is in a trading range (70-80% of the time). In the trending & quiet, there are not many retracements, during the trending & volatile there are larger reversal retracements.
It’s important to understand what type of strategy/methodology you are using and for which market it is designed. In most cases trend-following strategies do poorly when the market is in a trading range and counter-trend strategies lose when the market is in a strong trend.
Trading your strategy during the wrong market condition leads to losses and many traders will lose confidence in their system. This is setting yourself up for failure as our minds have certain cognitive biases that lead to erratic emotional behaviour. For example there is what is termed “recency bias”, this means that the mind gives more weight (importance) to events that happened recently. If you’ve just taken 3 losses in a row you may start having doubts about your system and start changing the settings on your indicators. If this sounds familiar it’s time to get out of this vicious cycle.
You need to test your strategy over 200 trades as a minimum. It takes about 200 samples until statistical probability becomes accurate enough to guage a percentage. If you’ve only tested over 20 trades, you have no idea if the system is a winner. After 200 trades you can see, ok I had 7 losses in a row once, 5 losses in a row three times, overall I won 45% of the time, broke even 20% and lost 35%, etc. By doing the math and seeing that your system is a real winner and that probabilities are on your side, this gives you the mental strength to not become a victim of recency bias when you are trading eminis
