Strategies · Lesson 3 · Beginner
Market state first
Before every setup you objectively determine whether the market is trending or ranging, and derive from that which strategy is allowed.
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Read first, then trade
Murphy: prices are in a range at least a third of the time. There whipsaws, funding and fees eat the account. Standing aside is often the most profitable decision.
Three analysts read the same chart as up, down and sideways because they lack a definition and a timeframe. Read the state mechanically off the highs and lows.
Mark the highest high and read off the sequence whether an uptrend is running.
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Test yourself
The market has been going sideways in a tight range for days. What is usually best?
- Stand aside, trend following fails in the range
- Trade more to exploit the range
- Leverage up because little is moving
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The key points at a glance
- An uptrend is higher highs and higher lows, a downtrend lower highs and lower lows.
- A range is at least a third of the time, and there trend following fails.
- Read the market state first, then choose the strategy.
- Hold in the trend, get out fast in the range.
Deep dive
Determine trend or range objectively: EMA slope and ADX
Three analysts read the same chart as up, down and sideways because a shared definition is missing. The fix is mechanical instead of gut feel.
- Higher highs and higher lows are an uptrend, lower ones a downtrend, otherwise a range
- EMA rising: long only. Falling: short only. Flat: stand aside
- ADX below both directional lines: no tradeable trend
- Elder wants at least two timeframes, in a conflict the larger one wins
Why range trading with leverage is especially expensive
Murphy estimates that prices spend at least a third of the time in a range. There the chop eats your account from several sides, and low volatility tempts you into higher leverage.
- False breakouts stop you out with many small losses
- Fees add up over many trades
- On perpetuals you also pay funding on every position
- A quiet range is often the antechamber to a breakout
One strategy per market state
The state decides not just whether but with what you trade. Trend-following tools like the MA and MACD work in a trend, oscillators like RSI and Stochastic catch reversals in a range. The same tool in the wrong state is a loss generator.
The tactics flip too. In a trend you can hold and add into a winner; in a range you take profit quickly at the first sign of a reversal. Before every trade mark the state and the allowed direction, which you can practice on the demo exchange.
Sources: Elder, Murphy, Goodman
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