Better Trading Opportunities With Market Context

Posted in: Basic Trading Strategies, Trading Article

Market context is a foreign concept to many traders.

Often if I ask a trader that context of the market they are trading, the reply is usually a string of words that don’t answer the question.

In fairness, it is a concept that can be difficult to fully grasp and if you are unsure of what I am talking about, let’s dig deeper.


Context Doesn’t Have To Be Complex

Context in relation to trading comes down to what the market is doing and how it’s doing it.

Context can therefore help you to assess trading setups and identify new ones.

A very basic level of context might be that a market is strongly trending up as evident by large green candlesticks and looks likely to continue to do so. It may in this case be more favorable to look for opportunities to go long that fit in with your trade plan.

I’d like to suggest a simple context checklist that you might wish to use and add to. This could be useful in identifying Forex pairs or stocks that are currently trading in a manner that might fit in with your plan.

It might also be beneficial for day trading in order to tell you when it would be a good idea to press ahead full steam and when to back off and be a conservative trader.


Higher Time Frame – What’s Up?

The first thing I’d say is that it’s really important to align yourself with the higher time frame. It’s easy to become zoned in on your trading chart and therefore miss the key market signposts for when bigger market-moving activity is likely to come in.

By routinely assessing context across several time frames, you are forcing yourself to maintain a constant awareness of what phase the market auction is currently in.

So the next question is of which time frames to look at outside of your primary period of trading (or range bars, volume, or whatever you use to trade).

I would suggest that you should start to look at least two higher time frames.

However, more than this isn’t likely to be beneficial and is will probably only serve to unnecessarily increase your analysis….which leads to paralysis.

For day trading, I would suggest at least assessing context on a daily and a 60 minute chart. If you believe it would be helpful, you could also look at a weekly chart.

If you’re swing trading, I’d suggest a weekly and a daily chart, with the additional option of looking at a monthly chart.

As time goes on, you may decide that a period of 3-5 times higher and lower than your trading time frame is enough.


Simple Market Context Checklist

Some of this may be a little subjective and unfortunately, this is often why people struggle to grasp market context. However, with a bit of practice it becomes easier over time.

Click To Download A PDF Copy

As you can see, it’s doesn’t take a great deal of effort to assess the current longer-term context in the market. It may be something you wish to do every single day, or it may be something that you find is only necessary to complete a couple of times per week.

Either way, if you have some idea of market context you will have a competitive advantage over many other traders out there.


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Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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