Top 6 Forex Market Types You Need to Know
Education - | 26 Apr 2019
No doubt you must have heard the saying about ‘using the right tool for the right job’.
Whether you’re trying to finish a project at home or in the office, you will most likely get positive results if you use the right tools for the job.
The same is true with forex trading.
You need a bullish trading system (the right tool) to ride a bullish market. And the same when markets have turned bearish. You need to use a bearish system to capture the downward trend.
While that may sound simple enough and the only obvious thing to do, the reality maybe different for many traders.
Most people tend to use one tool (and not always the right one) for all jobs. They think one tool for all types of jobs will do the trick.
It’s like using a driver instead of a putter when you’re trying to get the golf ball in the hole when you are on the green. Wrong club.
Why you need different tools for different market types?
When it comes to forex trading, the question is why do people use the same trading system even if market conditions have changed and the market has taken a new direction?
Before we consider the different market types and what strategies you can use for each, one important thing to keep in mind is markets tend to move in at least three different directions: up, down and sideways.
And as you no doubt know already, even in an upward trend some markets tend to pull back and then retrace. Similar moves can happen on a downtrend when some markets can bounce back up before dropping lower again.
Knowing that markets move up, down and sideways is the clearest indication traders need different trading systems (the right tools) for different market types.
There is no point in holding to your bearish trading system when the market is running bullish and vice versa.
Different market types
While bullish and bearish are the major market types commonly known to traders and investors, Van Tharp, world-renown author and trading coach said he’d identified about 25 different market types. However, he said traders should be primarily concerned and familiar with six market types, which he described as:
- Bull normal – general suited for trend following traders who prefer to buy and hold for the medium to long-term
- Bull volatile – this market type calls for a more active trading strategy to ensure you stay on top of market movements as prices fluctuate
- Bear normal – the opposite of a bull normal market and may suit those who want to sell and hold until the trend reverses
- Bear volatile – the opposite of the bull volatile market and may suit those who want to participate in a more active market on the short side (going down)
- Sideways quiet – it’s been said that markets move in 3 major directions; up, down and sideways. Markets that move sideways require a much more patient approach compared to markets on a definitive up or down trend. Sideways moving markets can be precursors for breakouts (both on the upside and the downside).
- Sideways volatile – slightly similar to the sideways quiet market, this type may suit those who are looking for range trading opportunities. Bollinger Bands can be an effective tool to use to track the price ranges of particular currency pairs and other instruments you want to trade.
As you can tell, each of these different market types would call for different trading systems. And as you consider the different tools you use for trading, it may also be useful to analyse what’s stopping you from using the right tools for your forex trading.
Knowing the different market types and the corresponding price movements and directions is also helpful in finding the most suitable market that matches your trading personality.
Trading psychologists have always emphasized the need to develop a trading plan and strategy that suits one’s trading personality. As you have seen in the different market types (above), each tend to suit a different personality type.
So, if you’re aware of your trading personality it will make much more sense to match it with the most suitable market type.
After all markets tend to move up, down or sideways. Bear in mind you need to make adjustments to your trading and use the right tools when market conditions change.
A quote from Van Tharp says: ‘Expecting the same system to work in all market types is the definition of insanity.’
If you want to know more about the different market types and what trading tools and strategies you can use to optimise your trading opportunities, download our exclusive eBook on ‘7 Lessons for Understanding the Forex Market Types’.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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