Find the Path of Least Resistance in the Market You Want to Trade

This chapter explores the trading characteristics of three market classes: stocks, commodities, and foreign exchange (FX) currency pairs. Each of these classes is traded worldwide, and each has tremendous liquidity for ease of trading. Many traders assume that every market should be traded the same way, but, for whatever reason, market classes do behave differently. Moreover, within a market class the individual instruments behave differently in different time frames (monthly, weekly, daily, intra-day bars). This chapter will illustrate these differences and show a general approach for determining the characteristics of a trading class.

Finding the tendencies of a market class is a shortcut to finding good trading approaches for that class. If a market tends to trend in a certain time frame, trend-following techniques like moving averages, breakouts, trend-lines, and so forth are a good place to start the development process. If a market tends to counter-trend behavior, overbought/oversold oscillators like RSI, stochastic, or momentum might be good starting points.

Markets Are Different: Daily Bars

To illustrate that market classes can move in fundamentally different ways, we’ll use an easy-to-understand process on daily stock and commodity data. After the data is presented, you’ll probably agree that stocks move primarily in a counter-trend manner (weak stocks outperform strong stocks to the upside), ...

Get Building Reliable Trading Systems: Tradable Strategies That Perform As They Backtest and Meet Your Risk-Reward Goals now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.