Wednesday, 11 July 2007

Market states

An interesting part of the "Way of the turtle" book was about market states. One of the guiding turtle principles was to not try to predict which direction the market would move but instead to determine what market state it was in.

The 4 market states are:

  1. Stable and quiet

  2. Stable and volatile

  3. Trending and quiet

  4. Trending and volatile
Obviously, for trend based trading, state 3 is ideal. The market state changes over time, so it needs to be regularly checked.

The level of volatility could be used to decide where to set a stop loss, e.g. if the market state is 4, then having a one tick stop loss would drop you out the trade early.

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