Trading markets generally tend to fall into one of the two primary categories of trending and non-trending markets.
Furthermore, markets also demonstrate a number of more specific trading pattern types. These classifications will be described further in the following section. This article is for the beginner and the more advanced reader should go directly to this article for extensive information on chart patterns.
Trading Market Types
The following list includes the more common trading patterns commonly used by forex traders, technical analysts and market commentators to identify various market types or classifications. Also included in the descriptions for each type are the classic chart patterns that tend to arise in such markets.
- Trending – markets showing extended price movements in one overall direction, with occasional corrections or pauses. Trend lines can be drawn through a series of successive highs or lows to help define the general direction and slope of the trend.
- Up trends – markets characterized by higher highs and higher lows. Up trends can form upward slanted channel patterns when their upper and lower trend lines are parallel to each other.
- Down trends – markets characterized by lower highs and lower lows. Down trends can form downward slanted channel patterns when their upper and lower trend lines are parallel to one another.
- Trend-less – markets showing erratic price changes that do not last long before reversing, resulting in little overall directional price movement seen over time.
- Choppy – markets showing an erratic broadening pattern with a series of higher highs and a series of lower lows. Choppy markets show an increase in volatility and may form expanding triangle patterns.
- Sideways – markets showing a narrow trading pattern without making new highs or new lows and that does not reverse significantly. Sideways markets can form rectangle patterns. Also, when occurring after a significant move up or down they may form a flag pattern.
- Consolidative – a market that is gradually decreasing its trading range with a series of lower highs and higher lows. Consolidative markets usually form triangle chart patterns, although when occurring after a sharp move up order down, they may form pennant chart patterns instead.
- Ranging – markets trading in a range defined by a set of similar highs and a set of similar lows, often at important resistance and support levels. Ranging markets may form rectangle chart patterns, or after a sharp move they can form flag patterns.
Why Traders Classify Markets
These markets types are useful to identify, not just for market commentators attempting to describe succinctly what the forex market is doing, but also for forex traders since trending markets provide good profit opportunities for those traders that follow them.
Conversely, non-trending market types often allow traders to buy low and sell high, with stops placed outside extreme points.
Accordingly, technical traders will often peruse their forex charts carefully for signs that a trend they were following might be in the process of reversing or if the market is then entering a non trending period.
Following this market classification process allows them to adjust their trading strategies appropriately for the type of market currently prevailing.