Market Environment

Before placing trades, identify the market environment. Trending markets favor trend-following strategies; ranging markets favor mean reversion; high volatility requires wider stops and smaller position sizes.

In a trending market, price moves in a clear direction with higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). Use trend-following strategies: buy pullbacks in uptrends, sell rallies in downtrends. Trend lines and moving averages work well.

In a ranging market, price moves sideways between support and resistance. No clear trend. Use mean reversion: buy near support, sell near resistance. Avoid trend-following strategies; they lead to whipsaws.

High volatility means large price swings and wide candles. Use wider stop losses and smaller position sizes. Avoid overtrading; wait for clearer setups. News events often cause spikes—reduce exposure around major releases.

Look at the chart: Are swing highs and lows making HH/HL or LH/LL? That suggests a trend. Is price bouncing between horizontal levels? That suggests a range. Are candles large with long wicks? That suggests volatility. Use ADX or similar to quantify trend strength if needed.