Trending and Ranging Market – Types of Forex Market
Types of Forex Market. Understanding what the price is doing is an essential aspect of forex trading. Depending upon the type of forex market, we can get into a trade differently. So, it becomes imperative for a trader to understand which type of market is he dealing with.
There are two types of markets.
1) Trending market.
2) Ranging market.
Now, let us try to understand what is a trending market and ranging market. And then we will see how to identify the type of market correctly.
The market which tends to move in any one direction is called a trending market. In this type of market, the prices create a series of higher highs and higher lows or Lower highs and lower lows. It happens due to the imbalance between the buyers and sellers in the market.
Now, based on the direction in which the price is moving, there are two types of trending market.
1) Bullish Trending Market (Up-trending market)
2) Bearish Trending Market (Down-trending market)
Let us try to understand each one separately with the exact psychology behind it.
1) Bullish Trending Market.
The price is said to be in a bullish trending market when it moves in the upward direction. While moving in an upward direction, the price creates a series of Higher Highs and Higher Lows.
2) Bearish Trending Market.
The price is said to be in a bearish trending market when it moves in the downward direction. While moving in a downward direction, the price creates a series of Lower lows and Lower highs.
Let us try to understand the psychology behind the bullish trending market.
Why does price create higher highs and higher lows?
Now, the price moves up because of the dominance of buyers over the market. It means that the number of buyers is more than the sellers, i.e., more traders are now on the buying side, and hence the momentum of the market is towards the buyers. It causes the price to create a higher high.
Now, when the price is moving up and making a higher high why does the price suddenly retrace and create a higher low?
It happens because at a significant level the buyers take profit which creates some opposing pressure. And this cause the momentum to slightly shift toward sellers.
Now, you must be wondering, If the buyers gave away the momentum to sellers why didn’t the market reversed and instead kept going back upward after the retracement. It happens because there weren’t enough sellers to absorb all the buyers and hence the price kept moving upward.
In the same way, we see lower lows and lower highs in a down-trending market.
The price is said to be in a ranging market when the price moves sideways. The price behaves as if, it’s trapped between two walls and whenever the price hits either of the walls, it bounces back.
Basically, in a ranging market, the price creates temporary support and resistance, and it continues to move between those.
The reason behind the formation of a range is that both the sellers and buyers are in equilibrium.
So, what makes the price to break the range?
When some traders enter the market who does not agree with everyone else and think that the price has much potential to move up or down, then it causes disequilibrium in the market and hence causes the price to break the range.
For, eg. Consider the price was in a range and it broke the range towards the downward direction, the price broke the range towards downward direction as new traders who entered the market believed that the price has the potential to move down hence creating disequilibrium in the market and causing the price to go down. Now when the price broke the range downward, it took the attention of more sellers, and hence more sellers entered the market which shifted the momentum of the market towards the sellers and made the price to keep moving downward.
The ranging market is considered as a haven for traders. Most of the traders feel most comfortable while trading ranges and a lot of profit is made through it.
It is essential to understand the psychology behind whatever the price does. You cannot just follow the rules blindly because you learned it from somewhere or your mentor told you so. Everything you see or any setup you get into should make sense to you. You are intelligent enough to see things clearly and make sense of every structure you see. If sometimes you cannot understand what price is doing and nothing makes sense to you, then stay out of the market and wait till everything makes sense.
I believe that if you have a proper understanding of price action and if you understand the psychology of the forex market it becomes much easier for you to make profits consistently.
So, these were the types of the market which we usually get to see in forex. In the next article, we will learn what trendlines are and how to draw trendlines correctly.
Types of forex market