Trending and Consolidating Markets – The Different Types of Forex Markets
Understanding what the price is doing is an essential aspect of forex trading. Depending on the type of forex market, we can execute trades differently, as such it becomes imperative for a trader to understand which type of market they are dealing with.
The market is split between two types of markets:
1) Trending Market.
2) Consolidating Market.
Now, let us look at what is a trending and consolidating market. And then we will see how to identify the type of market correctly.
TRENDING MARKET
The market which tends to move in any one direction is called a trending market. In this type of market, the price 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 markets.
1) Bullish Trending Market (Upward 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 take a look at the psychology behind the bullish trending market.
Why Does Price Create Higher Highs And Higher Lows?
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 reverse and instead keep 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.
Consolidating Market.
The price is said to be in a ranging(consolidating) 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.
During a a ranging market, the price creates temporary support and resistance, and it continues to move between those two levels.
The reason behind the formation of a range is that both the sellers and buyers are in equilibrium.
So, what makes the price eventually break that range?
This happens when a group of traders start adding trading positions to move the market in a specific direction, which in turn causes disequilibrium in the market and hence causes the price to break the range.
For example… 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.
These are the types of the markets which we usually get to see in the forex market. We offer very detailed and specific trading courses to learn how you can take advantage of these markets.
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