The 4 Major Types Of Market Behaviour
Getting Clear on Market Behavior
When you are trading directional systems, it helps when you understand that there are really only 4 types of major market behavior. And it happens across the different time frames in different magnitudes.
So what are the 4 major types of market behavior?
They are:
- Trending Up
- Trending Down
- Consolidation
- Sudden Sharp Movements
Trending Up
An uptrend is indicated when price at the right hand of the chart is higher than the left hand of the chart. An uptrend can be indicated by a zig-zag movement, illustrated in the chart of the EURUSD below.
Daily Chart of EURUSD in an Uptrend
Trending Down
A downtrend is indicated when price at the right hand of the chart is lower than price at the left hand of the chart. It can be indicated in a zig-zag fashion moving down, or sometimes just a straight, powerful trend without any pause. The straight powerful trend is shown in the USDCAD Daily Chart below.
Daily Chart of USDCAD in a Downtrend
Consolidation
A consolidation is price simply moving around in a range, forming a mass of upward and downward movements within an area. While there are many chart patterns which show consolidation, the one shown in the chart below is that of the USDCHF staying in a range.
Hourly Chart of USDCHF consolidating
Sudden Sharp Movements
Sudden movements in price are caused by unexpected events happening in the market. For example, news reports that are different from the consensus, causing sharp movement up or down. In some cases, it can even cause gaps in price where the sudden surge in orders to buy or sell simply skip over areas in the chart, caused by traders just wanting to get in or out of their positions.
Sudden movements can also be caused by major unexpected events happening, like earthquakes, floods, etc. It happens when market participants don’t have time to adjust their positions to the news, and simply have to buy/sell their positions.
Sometimes, after a sharp movement, price can move back. Other times, sharp movements are the start of a new trend. It depends on the nature of the news released, and how it impacts the perspectives of the major traders in the market.
Hourly Chart of Sudden Price Movements in the USDCHF
Summary
All directional trading systems are designed to catch an entry point based on one of the 4 market movements above. Either somewhere at the beginning of a new trend, the middle of a trend, or catching the reversal of a trend (which is the beginning of a new trend in the opposite direction).
On smaller time frames, some systems are developed to catch the beginning of market movement after hitting Support or Resistance levels on a larger time frame. For example, while the hourly chart may show a consolidation, traders may be catching smaller trends on the 15 minute time frames.
Ultimately, when you simplify the market down to its basic movements, it helps you to have a better understanding of the type of system you are trading. Which in turn, helps you in knowing what to expect and as a result, become a better trader.