The Types of Market Days - Handbook for a layman

22 ก.พ. 2022

Hi all, today we are going to see one of the most important concepts for day trading. This is an updated version with better illustrations and more exhibits. I have taken all the content from the book “Secrets of a Pivot Boss” and added illustrations and charts so that you don’t have to read the complete book. I am merely a presenter of the concepts written by Franklin Ochoa. The charts and illustrations are all done by me. So, without further ado, let’s delve right into the topic.

There are six types of market days that we will cover. Remember, these days are crucial for a day trader. These types of days are repeatedly seen in the market, but no two days are ever identical. As such, these categories should be used more as guidelines, rather than seeing them as etched in stone. Again, your ability to recognize the pattern of the day accurately will be a huge step toward successfully engaging the market

1. Trend Day

Illustration:

• Trend Day is the most aggressive type of market day.
  
• On a bullish Trend Day, the open usually mark the day's low, while the close usually mark the day's high, with a few ticks of tolerance in either direction.
  
• On a bearish Trend Day, the open will usually mark the day's high, while the market will usually close near the session's low.
  
• The market will typically start fast on this type of day and the farther price moves away from value, the more participants will enter the market, creating sustained price movement on increased volume.
  
• Initiative buying or selling is the culprit on this type of market day, as these participants are confident they can move price to a new area of established value.
  
• Price conviction is strongest during a Trend Day. The market will start strong right out of the gate and will usually maintain a unidirectional stance throughout the day, never calling into question the day's direction or conviction.
  
• This type of day has the highest price range (high price minus low price), meaning it can be quite costly if you are positioned against the market or if you fail to recognize the pattern early enough to enter alongside the market.
  
• These types of days only occur a few times a month, but catching these moves can certainly make your month, in terms of profits.
  
• Trend Day is usually preceded by a quiet day of market activity, which is usually a day with a small range of movement. Coincidentally, this type of market behavior will usually follow a Trend Day as well.
  

Exhibit 1:


Exhibit 2:


2. Double-Distribution Trend Day

Illustration:

• While this day is a trending day, it in no way has the confidence or conviction of a Trend Day.
  
• Instead, this type of day is characterized by its indecisive nature at the outset of the session.
  
• During this type of day, the market will usually open the session in a quiet manner, trading within a fairly tight range for the first hour or two of the session, thereby creating an initial balance that is narrow.
  
• The initial balance is traditionally defined as the price range of the first hour of the day.
  
• If the initial balance is too narrow, the price will break free from the range and auction toward new value, creating range extension, which is any movement outside the initial balance.
  
• After the initial balance of the Double-Distribution Trend Day has been defined, the price will break out from the range and auction toward new value, where it will form a second distribution of price. This is the market's attempt at confirming whether a new value has indeed been established.
  
• Double-Distribution Trend Day opens the session quietly, trading within a tight range that can be viewed as the day's "warm-up" period. Eventually, price breaks free of the range and begins trending toward new value, igniting initiative buying or selling.
  
• Once the market finds new value, it then builds out another range before ending the day.
  
• The ranges formed at both the beginning and end of the day is where the term "double-distribution" comes from, as the bulk of the day's volume resides at one of these extremes, essentially forming a double distribution of trading activity.
  
• The initial balance is the base for any day's trading and is extremely important to the Double-Distribution Trend Day.
  
• A narrow initial balance is easily broken, while a wide initial balance is harder to break. The fact that the initial balance is narrow on this type of day indicates that there is a good possibility of a breakout from the initial range, indicating that you will likely see a move toward a new value.
  
• The narrow initial balance at the beginning of the Double-Distribution Trend Day indicates that either buyers or sellers will eventually overwhelm one side or the other.
  
• Once the direction is decided, the price will freely move toward a new area of value since it is being driven by initiative market participants.

Exhibit 1:


Exhibit 2:


3. Typical Day

Illustration:

• The Typical Day is characterized by a wide initial balance that is established at the outset of the day.
  
• On this type of day, price rallies or drops sharply to begin the session and moves far enough away from value to entice responsive participants to enter the market.
  
• The responsive players push prices back in the opposite direction, essentially establishing the day's trading extremes. The market then trades quietly within the day's extremes for the remainder of the session.
  
• The opening rally or sell-off is usually sparked by reactions to economic news that hits the market early in the day. This opening push creates a wide initial balance, which means the day's "base" is wide and will likely go unbroken.
  
• A wide base during the first hour of the market will likely mean that the day's extremes will also remain intact, or unbroken.
  
• During this type of day, you will usually see price trade back and forth within the boundaries of the opening range, as fair trade is easily being facilitated.

Exhibit 1:


Exhibit 2:


4. Expanded Typical Day

Illustration:

• Similar to the Typical Day in that it usually begins the session with early directional conviction. However, price movement at the open is not as strong as that seen during a Typical Day.
  
• The initial balance is wider than that of a Double-Distribution Trend Day but not as wide as that of the Typical Day. Hence, it is susceptible to a violation later in the session.
  
• Eventually, one of the day's extremes is violated and price movement is seen in the direction of the break, which is usually caused by initiative buying or selling behavior.
  
• During an Expanded Typical Day, both the upper and lower boundaries of the initial balance are susceptible to violations. On any given day, you will see one, or both, of the boundaries, violated, as buyers and sellers attempt to push the price toward their own perceived levels of value.

Exhibit 1:


Exhibit 2:


5. Trading Range Day

Illustration:

• Both the buyers and sellers are actively auctioning prices back and forth within the day's range, which is usually established by the day's initial balance.
  
• On this day, the initial balance is about as wide as that of a Typical Day, but instead of quietly trading within these two extremes throughout the day, buyers and sellers are actively pushing prices back and forth.
  
• This type of day is basically like a game of tennis. The players stand on opposite sides of the court and take turns volleying the ball to one another throughout the match.
  
• Likewise, buyers and sellers will stand at the extremes of the day and will enter the market in a responsive manner when the price reaches the outer limits of the day's range.
  
• Responsive sellers will enter shorts at the top of the range, which essentially pushes price back toward the day's lows, while responsive buyers will enter longs at the bottom of the range, which pushes price back toward the day's highs.
  
• This type of market day offers easy facilitation of trade and gives traders amazing opportunities to time their entries.

Exhibit 1:


Exhibit 2:


6. Sideways Day

Illustration:

• On this type of day, price is stagnant, as both buyers and sellers refrain from trading. This type of session usually occurs ahead of the release of a major economic report or news event, or in advance of a trading holiday.
  
• There is no trade facilitation and no directional conviction.
  
• The initial balance is rather narrow, which at first indicates the potential for a Double-Distribution Trend Day. However, the initiative buying or selling required for a Double-Distribution Trend Day never enters the fray, which leaves the market terribly quiet the rest of the session.
  
• The Trading Range Day and the Sideways Day sound similar, but the difference lies within the participation levels of both buyers and sellers.

Exhibit 1:


Exhibit 2:


So, with this, we are done with all types of trading days. Remember, each of these types of days is not set in stone. While every market day is similar to a day from the past, similar does not mean "exactly." You must be able to snuff out the subtleties of each new day as it relates to a day from the past. Steadfast practice creates a valuable experience.

Disclaimer: This is NOT investment advice. This post is meant for learning purposes only. Invest your capital at your own risk.

Happy learning. Cheers!
Rajat Kumar Singh (johntradingwick)
Community Manager (India), TradingView

What type of trader are you? A day trader, or a swing trader? Let me know in the comments. Also, if you need a PDF of this post with all the charts and illustrations, check out the links in the signature section (under the post).