Market Types - what does this mean?

There are all sorts of markets - stock markets, commodity markets, financial markets, long and short markets, volatile markets, etc.

These descriptions all mean different things to different traders, so we have to define the types of markets that are if most interest commodity traders.

How is the market behaving? - is a question commodity traders often ask – what is the market doing? - is the same question.

Commodity traders invariably trade trending markets and their usual interest is whether a trend is about to begin or end. In this case, if the trader is not in the market, he will probably see it as a ‘going nowhere’ or choppy market. He will be interested in whether this market is likely to trend and he will have a system that is designed to latch onto the trend when it starts.

If the market is zigzagging vigorously, which is also known as ‘whipsawing’ the trader will not wish to join it at all. His system will be designed to keep him out of such dangerous markets as far as it is possible.

If the trader is already in the market, he will be following the trend and wondering when it will end. How soon should he say that it is time to leave the market if it looks like changing direction? His system will have rules for that and he will follow his system.

Markets that are prone to sudden vigorous movement are known as volatile. All markets are more or less volatile at any time and volatility is needed in order to make money in a market. As long as the volatility is accompanied by ‘direction’ i.e. trending upwards or downwards, then good opportunities will exist.

Bearing in mind that commodity traders are trying to catch trends, the sooner they enter the market the better. But, the sooner the entry the less certainty and the more risk of loss - and the later the entry the more certainty but the lower expectation of profit. The trader’s system has to balance these two conflicting aims – lower risk versus increased profit.

The types of markets likely to preoccupy the systems trader are trending markets and choppy markets. Volatility is an extra characteristic that is present in both trending and choppy markets and describes how vigorously the market is behaving. Vigorous but not too vigorous is what traders like to see.

 

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