Trade based on what the market is doing

All aspects of the market cycle between extremes. That’s true of price, of course, but also of other measures: Volume, volatility and the degree to which price moves sideways (“choppiness”) or vertically (“trendiing.”)

All combinations occur: High volume and high-volatility (trendless) chop, low-volatility and low-volume trends, high-volume, low-volatility trends, etc. Each such combination has different characteristics, and so requires different trading plans and trading strategies.

To be consistently profitable, you have to know the type of market you’re trading–the “weather conditions,” if you will–and use trading plans and strategies known to be effective for those conditions. Just like a boat captain or airplane pilot prepares and plans his excursion based on the weather, a trader should pay attention to market type: Narrow or wide range? Inside or outside the previous range? Choppy or trending? High or low volume?

I have my own proprietary indicators that help me determine the type of market. Some of them are shown in the linked chart.

(Clink on image for larger/full view)

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