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How to trade the market states?


I was asked a question how to trade the market states from discretionary perspective. This turned out to be a very complex question. Every school of technical analysis (or price action) incorporates some kind of market state detection method. The basic market state classification comes from Curtis Faith. So maybe it would be a good start to read his book about the turtles method.

However I am not satisfied with that answer. I think that everything depends on the level of understanding of the trader. If an experienced trader is reading those materials he would not ask this question because he will figure out by himself if this is an usefull stuff for him or not.

Howevewer let consider we have been asked by a novice trader. I think that it would be nice if he gets some knowledge of the basic tenets of technical analysis and price action in the first place.

For this reason we made a special group about price action where we have collected some links. The group is called  Price action and pattern trading with statistic edge. Here I recommend the law of the charts by Joe Ross. He has his own method of market states identification but you can compare it with our classification that is upgraded with fractal dimension and scales (read Anchor and Trigger).

Basically Joe Ross uses the concepts of ledges  and consolidations as ranging patterns. Please read the law of the charts page 8.

What Joe Ross does is that he makes from theoretical point of book very simple connection between the market state and the logical entries. Have a look for his method of Trader's trick entry. After reading this you would have a better understanding after the identification of the market state where the entries are.

This method is quite different from the classical technical analysis. The classical technical analysis methods rely on a very specific patterns that are related with the changes of volatility (heteroscedasticity) and accumulation of orders. When the volatility slows down the market tend to draw the typical technical analysis figures. During this process order start to accumulate and they are triggered afterwards. During this process break - out levels are detected and exploited by market technicians. Every technician has a method of market state identification, the most basic one is to distinguish two states a trending state and range state. When the trending state is detected it is preferred to use moving averages, when the ranging is detected the oscillators are more appropriate tools because they do not lag. However from there many others questions and uncertainties arise that I can't summarize here because it is complex I want to mention that always different scales are examined by the analyst, have a look of the Triple screen method by Alexander Elders.

And finally, last but not least it was revealed the relationship between the market states and with the accumulation of open orders and market states. This is very visible in the EUR/USD. You can check this link. This was intended basically as an upgrade of the Price Volume analysis.

So this is what has been developped here and we hope it is a valid market knowledge you can use in your  own research. For the beginners I ask them to start start with Joe Ross as the most simple introduction in price action. It is worth even if you deal with EA trading because EA trading and discretionary trading share a common aspect: the ability to appreciate if your trading method (manual or authomatic) is able to perform on the current market state.