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The market moves in definite steps, and these steps can be isolated and studied, one by one. Furthermore these steps follow each other in a regular sequence, and that sequence can be defined and analyzed, piece by piece.

If we understand the “type of trading” that the market is manifesting at any given moment, we will be able to come up with the tools and techniques that are most effective for that particular kind of market activity. Furthermore, if we know which type of trading came before, which is here now, and which is likely to follow, we will have a leg up on most other traders. We will always be able to choose the best tools to use, and we will be prepared for what is about to happen. Sometimes that’s half the battle in trading.

Experience and a technical analysis explained course has shown that our definitions of types of trading must be crystal clear and without the slightest ambiguity, otherwise our analysis quickly gets muddy and loses value. Furthermore we want definitions that can be applied to any market, and to any timeframe. We need definitions that are both simple and robust.

In this technical analysis explained series we will spend some future articles talking about the types of trading, and we will find that simple definitions combined with careful observations can take us a long, long way toward trading success. We need to be very organized about our observations, however.

We will start with a simple overview, so that you can see how things will fit into the big picture as we proceed. Then we will start with our discussion of the market in a trend run. After we make our observation about trends, we will see how the Drummond Geometry tools combined with time period analysis will enable us to identify those areas where the trend is likely to originate, and where it is likely to terminate. We will also see how our monitoring tools, the envelope and the 1-1 zones, fit in with our growing collection of theory and practical observations. And finally we will suggest some trading rules that may help you as you develop your own trading plan.

So, let’s get started….

We divide all market activity into two major divisions: trending markets and markets in congestion. We further divide congestion into congestion entrance, congestion action, and congestion exit. We add trend reversal as a final market condition, making five “types of trading” in all.

The definition of a trend is irrevocably attached with the position of the close of the bar vis-à-vis the PLdot. There is no other element to the definition of a trend, though there will be lots to say about the characteristics of various trends. But not the fact of the trend. A trend is always defined by this rule: If there are three closes on one side of the PLdot, the market is in a trend. This is the three-close rule, and there is no kind of trend that can exist without this three-close-on-one-side-of-the-PLdot rule. Never. Next in our series on Technical Analysis Explained we will talk about Congestion Entrance.

Ted Hearne is a Forex and bond trader who has written extensively about trading and has co-authored a “technical analysis explained” course called “Drummond Geometry”. His biography and further information about his work can be found at the technical analysis explained website.