Most traders rely on mathematical indicators, such as moving averages, to time the market. Many systems also rely on them. These approaches can sometimes work. However, they leave out the big picture.
If you want to understand the market, you need to read its structure and natural order. This means grasping at any moment of time the entire market cycle and being able to pinpoint the specific phase that the market is in.
To do this, your best approach is to use market structure. This means understanding what the market is doing, regardless of what a moving average, mathematical indicator or entry and exit technique might be telling you.
A stock trading system may be giving you a signal while the market is doing the opposite of what is needed for your trade to succeed. An example is buying a moving average crossover while the market is going south.
Another example is entering the market based on a breakout of a resistance point when the market is in a short-term upward correction within a long-term bear market. Your stock trading system tells you to take the trade, but the big picture of the market is telling you otherwise.
This is particularly true if you are a long-term investor. Why stay in a market when its “big picture” based on market structure tells you a bear market has begun or why exit your long-term position because a moving average has been crossed downwards, when the market is only experiencing a momentary correction before resuming its course?
To avoid these false signals, you must learn to read the market using its natural structure and natural order and principles. Using indicators and moving averages or using specific trading setups is okay. However, above all, you must learn to read the market itself.
This applies to every market. Whether stock trading, Forex trading, or commodity and futures trading, and whether or not you use mathematical indicators, learning about market structure is a must, especially if you want to avoid unnecessary losses.
An example of reading the market is being able to recognize when the market is making higher highs and is in an uptrend or when the market is making lower lows and is in a downtrend. This is not as easy as it seems.
To this you must apply a time factor that will enable you to differentiate between a real reversal and a fake one. Additionally, you must check the market’s behavior in relation to its main laws, such as the law of action and reaction, the law of inertia and the law of alternation.
The best way to learn how to read market structure is by reading all market structure authors. There are not many. When you find a trader who uses market structure, learn from him. You will learn a lot.