Day Trading Signals - Different Sets of Signals For Different Market Conditions

 

When a market is trending, use a continuation signal. When a market is ranging, use a reversal signal. All markets tend to go through periods of either strong trend movements or periods where they move up and down within a narrow trading range. Generally it has been observed that the ADX (average directional index) indicator can be used to determine whether a market is in either phase. Of course ranging or trending activity can be visually confirmed on the charts but this ADX indicator can also confirm this more accurately.

Trending vs ranging markets:

Continuation signals

Continuation signals are used and sought on the charts when the underlying market is in strong trending mode with ADX above 20, and ideally rising slowly. The first reversal signal makes the case that a new leg is about to start, as part of the existing longer rally or decline. So this new move will be in the same direction as the previous move. There are many types of continuation signals, even a simple "head & shoulders" can be a seen as a continuation signal in a strong uptrend and not as a warning that a top has been made.

Reversal signals

Reversal signals are used when the underlying market is in ranging mode and its ADX reading is below 20 or about to fall below 20. In this case the market in question has a tendency to trade up and down within a narrow range. We know that as soon as the market reaches the top or bottom boundary of this range is due for a reversal and about to make a small move until it reaches the opposite boundary. Typical indicators for identifying turns in such ranging market periods are all types of overbought/oversold indicators such RSI, Stochastics and many others.

In practice

Sometimes it can be extremely difficult to figure out what phase a market is really in. Markets don't fully respect trading ranges while being in a ranging phase and equally don't always start a direct trend in the expected direction without first making an intimidating move in the unexpected direction. Traders are strongly encouraged to seek further advice and if possible, particularly in the case of new traders, look for a mentored, live trading service to learn how these simple indications are read in practice, how professional trading educators use multiple time frames and additional confirming indicators to tell the fake trend breakout from the real thing or how to tell a real ranging market from one that's about to make a massive move - Yes you guessed it right, major tops and bottoms are often identified with ranging trading activity and it can be dangerous to make oversimplified decisions.

Paul Murphy is a passionate and successful trader. Always in search of the best trading systems, and researching ways to help you be the best trader you can possibly be.