How to Identify the Market Type (Trending/Ranging)


market types Olymp TradeThere are some basic concepts you should learn about in order to become a successful trader. And this article will cover one of such. Different methods, different indicators and strategies may be used in trading. But before you will even think about them, you should be able to recognise the market situation. Only then you can choose the right tools.

When you look at the price chart for the first time, it might be a bit overwhelming. You see some movements but have no idea what they mean and how to act on them. It is like learning a new language. In the beginning, it is complete chaos. You are not able to distinguish a single word. But with time, you do not only understand separate words but also the context. Even if you are not fluent yet, you are able to use the language. Trading needs practice as well. At first, you will not recognise any patterns but with time you will be able to read the price chart by only looking at it.

Two market types

Generally, we can recognise two types of the market. One is known as the trending market and the other one as a sideways or ranging market. The first one is characterised by continuous price movement in one direction. The second one by the lack of such motion.

Trending markets

We can further divide trending markets into two categories depending on the direction of the price movement. And so we have an uptrend or a bullish market when the price is rising. The downtrend or the bearish trend is recognised when the price is decreasing.

Trending market
Trending market as a sequence of highs and lows

This information is very important because you want to open trading positions in accordance with the market direction. And the sooner you will identify the trend, the faster you will enter the transaction and the more profit you could get.

Note, that even when the price is going in one direction, it does not move in a straight line. Instead, it moves in waves. A wave has its highest point, the peak, and the lowest, the trough. You will hear different names but the most commonly used ones are highs and lows.

During the uptrend, each wave will be situated higher on the price chart. We say that the price forms the higher highs and higher lows. In the downtrend, you will observe the lower highs and lower lows instead.

The trending market on AUDUSD hourly chart
The trending market (downtrend) on the AUDUSD hourly chart

Ranging markets

As I have said already, the ranging market is when the price does not show sustained upward or downward movement. It goes sideways and stays within a certain range. You would rather want to avoid trading on such occasions so it is also important to be able to recognise when the market is in the ranging phase.

ranging market
There is no clear direction in a ranging market

In terms of the waves, there is no consistency in the sideways market. The price is sometimes forming higher highs, sometimes lower highs and the same with the lows. You will see both, the higher and the lower lows in the ranging markets. The most important is that there is no clear direction the price is heading.

The ranging market on AUDUSD hourly chart
The ranging market on the AUDUSD hourly chart

Summary

Recognising the phase the market is in is crucial for your trading performance. There are two types of the market, the ranging and the trending. Trends can be in the upward and downward directions. It is not always so easy to identify the direction of the trend as the price tends to pull back. The higher highs and higher lows will give you a hint about the uptrend while lower highs and lower lows about the downtrend.

Check the Olymp Trade demo account which is offered completely for free for the platform users. Choose different chart timeframes for different assets so you practice recognising trends in diverse circumstances.

Have a good experience with Olymp Trade!

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