The first thing a trader must do each day before entering a trade is to determine the type of day it is and what is happening with the current price action in that market at the moment. Understanding how the type of day affects the way you read the price action is important. When I talk about “type of day,” I’m talking about the fact that the market is either trending or ranging. If the market is ranging, then I must trade using range rules. If the market is trending, then I am using trend rules to enter. The market can really only do three things: It can trend up, it can trend down and it can be stuck in a range. In essence, the market is either trending or ranging, so determining which one it is doing is key to your overall day trading success.
If the market is trending, we don’t care which way really as day traders, we just need to find ways to enter with the trend that get us into that market at the most opportune time to catch the next big move. If the market is trending down, we are looking to enter short during pullbacks to the EMA and/or trend line. Those are the key areas where the best entries will almost always set up. If the market is trending up, we still want to do the same exact thing, and that’s to enter the market long during pullbacks to the EMA and/or trend line. There are also opportunities to find good entries with the trend on pullbacks to test the former break out points as well, but this takes more experience and is more risky than entering on pullbacks to the EMA and/or trend lines.
If the market is ranging, then the high probability areas to enter are at the highs and lows of the range. If prices are approaching the lows of the range, then we need to consider going long. If the prices are approaching the highs of the range, then we should be considering going short. There will occasionally be some good entries along the way from the highs to the lows, or from the lows to the highs, but they are more risky and require a trap pattern in many cases. The most important thing to remember though is that the high probability entries during a range type day are at the highs and lows by taking a counter trend type entry.
Below is an excerpt from an article that I found at www.4xeducator.com. Don’t get too caught up on any trading strategies that the article discusses, but be sure to read the part about range days and trend days and how often they occur and how to distinguish between the two types of days, because that’s the point I’m trying to show you.
The markets tend to trend about 25% of the time and range the other 75%. In order to capture a big portion of a move you need to understand what kind of day you are trading. This will GREATLY influence your decision to take profits or let a trade run.
So the first question we need to ask ourselves is: Will this be a Ranging Day or a Trending Day?
How to trade on Ranging Days- on a Ranging Day you are going to want to do two things:
1. Take your profits quickly. This basically means that if you get a trade that goes for you then you quickly take the profits. Why? Because a range day will bounce between support and resistance. On a range day there may be no clear trend or direction so once you have a move in a direction for a short period of time you need to take profits. Usually on range days there will be small spurts of activity flowed by reversals or retracements.
2. The second thing you want to do is know where your support and resistance is. The reason for this is that when a news announcement comes out near these support and resistance levels there are two things that can happen. Let’s say that price is hovering near a support level before a news announcement comes out. Then when the news announcement comes out it triggers a buy. Well because you know it is a range day and you are near a support level, you know that the technical’s line up with the news trade therefore giving it even more support to reach its target.
Trending Days – A trending Day is defined by a movement that exceeds the range day by roughly 50%. For an example, an average ranging day on one parity might be 30-60 pips in either direction. However on a trending day that figure changes to 90-124 pips in either direction. Trending Days only happen about one or two days a week and are usually the result of a big surprise in a key news announcement.
I’ve already made it clear that I’m not interested in how he determines the type of day, because that should be visually easy to do if you study our price action trading system rules. His article is also talking about the forex markets and we don’t trade forex markets for reasons we discuss elsewhere on our website, but the information is transferable to any market, so don’t let that stump you either. Just remember that you goal each day is to determine what the market is doing first and foremost. Your first task each day is decide if it is trending or ranging. If it’s trending, you will want to use our price action trend rules. If the market is ranging, then you will need to use our price action range rules. If you try and use range rules on a trend day, you will have issues and if you try and use trend rules on a range day, you will probably lose money then too.
Understanding how the type of day affects the way you read the price action is a critical key to becoming a profitable day trader, so you must be able to do this with ease. Also, you should understand that the day can change on a dime too. Prices might be in a range for hours, only to break out and trend strongly, and while it happens less frequently, prices can be trending strongly and then go into a trading range through the close of the day. So, be flexible and simply follow the price action and you should be in good shape. If you want to learn our price action day trading rules so that you know the range day or trend day trading rules, then we can help, so spend some time on our site reading our price action trading information. Learn how you can become a price action trader by checking out our information at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.