Market Types

These are the six market types and the percentage of time we’ve been in them (rolling 13 week windows) since about 1950. Down quiet markets very seldom occur (about 2% of the time), but the other five market types do occur often enough that you need to be able to find something that works profitably when it does happen.

1/ Up volatile (11%)
2/ Up quiet (19%)
3/ Sideways volatile (20%)
4/ Sideways quiet (38%)
5/ Down volatile (10%)
6/ Down quiet (2%)

Develop several strategies that fit your view of the big picture and understand how each of these strategies will perform under various market types. The ultimate goal of this step is to develop something that will work well under every possible market condition. It’s actually not that hard to develop a good strategy for any particular market condition (including quiet, sideways). What’s difficult is to develop one strategy that works well under all market conditions—which is what most people attempt to do.
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application of this to our OIL is as follows: for OIL we need to what state we are going to be in next 4 days. When OIL reached 81.5 on 10/26/09 morning we need to identify for next 4 days the probabilities are
sideways volatile chance 30% - meaning varies -2% to +1% but over all remains at this same level at end of 4 days
down quiet chance 40% - meaning drops 1% per day

so once we identify this percentage, we can choose what trades types we take like zero-cost cylender ( at money sell call/buy put ) or plain "buy PUT" etc..

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Trading Styles

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asr: How to identify Oversold / overbought , here are few links

Oversold Market Reaching Extremes

2/ using telechart T2 indicators for each sector to find extreme values
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asr: one of 3 of TA/FA/Sentiment is overridding other 2 case.
- but in general beaware of buying/selling in "overbought instuement in OB market " same way "OS instrument in OS market"

How can do you quantify odds of 10-1 in your favor before you make a trade? Is it your profit goal is 10x more than your stop loss?
The point here is that whatever analysis you undertake to evaluate a potential trade (technical, fundamental, sentiment, etc.) in most cases you want the factors to be lined up in your favor. Where most people have trouble with this is that they think they can simply use a check list in every environment they face to produce consistent results. Unfortunately, the market doesn’t make it that simple. At times, you must learn that extreme sentiment readings (like oversold stocks in an oversold market) outweigh the poor technicals for example in terms of your risk/reward evaluation. At other times, perhaps fundamentals (like a stock trading so far below its book value) outweigh poor sentiment and poor technicals.

And, yes, it also works the other way around. For example, not making a trade (but adding it to the watchlist instead) in a stock where you really like the fundamentals but can’t justify the buy yet because the stock is currently too overbought in an severely overbought market. Evaluation of all of these factors is really the tricky part and why I can’t really provide you a simple risk/reward checklist to generate your own low-risk high-reward setups because not only is each trade different, and the market conditions itself change so your strategy and analysis of it must adjust. This is where experience and skill plays a significant role in trading successfully.
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