In stock trading or any other type of financial trading, there are different trading conditions that you need to be aware of. There are main 3 type of trading conditions.
3 Type of Trading Conditions
1. Trending Trading – A stock is trading in the same direction for a long time whether an uptrend or a down trend.
2. Range-bound Trading – A stock is trading in the same range for a long time.
3. Trend Consolidating – A stock is trading in the consolidating area. It may break higher or lower when it finishes consolidating.
Strategies for different trading conditions
We must apply different trading strategies to different trading conditions. It is not advisable if you apply the strategies to range-bound trading or trend consolidating strategies to trend trading. There is a famous saying in the stock market call “never trade against the trend”. When a trend is strong, you should never trade in the opposite direction because you will get burn.
Trending Trading Strategies
When you recognize a positive long term trend, the easiest and most profitable strategy is to let the profit run or buy and hold until the trend breaks.
What about the technical indicator such as Stochastic says the stock is overbought?
- Ignore it. When a stock is in an obvious positive trend, the stochastic can stay in the overbought area for a long time. If you sell the stock, you will end up losing a lot of potential profit.
Range-bound Trading
When you recognize a stock that is trading in the same range for a long time, then it is profitable to buy the stock when it hit the low end of range, and sell the stock when it is near the high end of the range. You should not apply the trend trading strategies here because you will end up with little profit or even worse, little loss or barely break even. You can apply the technical indicators here to find the best entry points and exit points.
Trend Consolidating Strategies
Sometimes a stock will be in the consolidating area for a long time and it is what I considered the hardest trend to trade. Usually I would skip this stock and try to get in when the stock break out of the consolidating area.
