Market Climate - what does this mean?

Market Climate describes the behaviour of a market price at a particular time.

The price may be moving up – known as the ‘long’ direction or it may be falling in the ‘short direction’.

It may be moving vigorously or gently. On the other hand, the price may not be moving very much at all – it is ‘flat’. Or it may be zig-zagging around and getting nowhere.

This information is important to system traders who may be considering entering a market, or who need to decide whether to leave a market they are already in.

In addition to the direction of the market (long or short) the market can be described in one of four ways:

Flat

Choppy

Trending smoothly

Trending vigorously

System traders have ways of interpreting price movement to determine what a market is doing and incorporating the information into their systems. The important point to note is that the time scale is of major significance.

For example, does the trader want to know what the market has been doing over the last week or the last three months? It will depend on whether his system trades for the longer or the shorter term. His system may require information about both the longer and shorter time scales

A market may have been trending vigorously for the past 12 weeks but right now, viewed over the last week, it may be flat.

If market climate information is to be of any use, a time period must always be specified. The information is generally used as what is known as a ‘filter’ which can be regarded as an extension of the system rules.

 

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