What is market context and how can it help you make better trading decisions


Trading in the right context can make a huge difference. Being able to understand the market context in which you are making trading decisions can help you filter out potentially troublesome trades and enable you to get into high probability trades more often. In this article, we will explain which tools and concepts to use when it comes to understanding the market context and how it can help you make better trading decisions.


Top down

Every good market analysis starts with a top-down, multi time frame analysis. Every week you should take a look at the monthly and weekly time frame first. You don’t necessarily need to get too much into the details here, especially if you are trading on the 4H, 1H or lower time frame, but understanding the higher time frame context is key. Here are a few things to look for and ask yourself on the higher time frame:

  • Mark the closest and most important support levels so that they are visible on the lower time frame
  • Define whether you are in a range or a trending market
    • Is the trend over-extended? Has it just started? Is it running out of momentum?
    • If you are in a range, are you near the top or the bottom? How are the odds of the levels holding vs. breaking? Is it a tight range or is there potential for swings?
  • What market environment I usually perform well under?
  • How is the market volatility level? And what does it mean for my overall trading approach?


Risk on and risk off

Risk on and risk off are macroeconomic terms that describe the general risk sentiment of investors and traders. Risk on means that investors have a higher risk appetite and are willing to invest more in asset classes such as equities and index futures.  During uncertain times, risk off means that investors are trying to reduce their overall risk exposure and look for more conservative investments such as safe-haven currencies, government bonds or gold.

Knowing if you are in a risk on or risk off environment can help you with market and asset class selection. Generally speaking, you usually want to stay away from illiquid and slow moving markets and look more into markets where momentum is high.

The CNN greed and fear index can help you find out what the current market state is and it combines some market metrics to come up with a risk on/risk off estimate.


Overnight Asian session, European follow through and what it means for the US

Markets don’t exist in isolation, and it’s important to look at other asset classes to get an understanding of what to expect during your trading. What has happened in Asia or Europe will usually influence the trading activity in the US later. Or, on the other hand, what has occurred in the US is likely to affect trading activity in Asia and Australia.

Before you start your trading day, it is always a good idea to check overnight trading activity. You don’t have to analyze too many markets, and it’s not necessary to get too lost in the details; you just want to get a general overview of what has happened and what it could mean for your trading.

To be more specific, we suggest to take a look at all the major international indices and also examine how the commodity markets have performed. Recent trading activity emphasizes the importance of this approach; with the uncertainty in Asia, and China in particular, and with deteriorating oil prices, every time we had a major sell-off in those markets, it also affected European, US, and other market activity. Now that things have calmed down again, markets all around the world have stopped their sell-off and are rising in sync together. It’s common to have one, or a few, central market drivers and it pays off if you know what they are.


Trend vs. range execution time frame

We have briefly mentioned this during the top-down aspect, but it also plays an important role once you move down to your lower, execution time frame. Being able to differentiate between ranging and trending markets is a vital skill as a trader. Different trading strategies perform differently under different market environments. But this goes even further; various trading strategies perform very differently during different market phases. This means that some trend-following methodologies perform better at the early stages of a trend whereas others require an established trend and then exploit pullbacks. The same is true for range trading, reversal trading and all different types of trading systems.

The first step has to be that you are clear about when you have an edge. What are the exact conditions that your trading system needs to perform best? And what is it that your trading method can’t deal with? Then you can analyze the current market context and only expose yourself the high probability setups. Here are a few bullet points that can help you make sense of market context:

  • Are we in an early or late stage of the trend?
  • Is the trend looking overextended? Is volatility increasing and does it signal a potential market top? Are moving averages holding during the trend and do they offer re-entry opportunities?
  • Is price making higher highs or lower lows?
  • Is the momentum strong and are support and resistance levels likely to break?
  • Are the range boundaries weakening? Is the range becoming a triangle or a wedge?
  • Is volatility increasing or decreasing?
  • How are other, correlated markets performing right now?


Although we have thrown a lot at you, don’t get discouraged. It’s not necessary to implement it all at once, but take one idea at a time and incorporate it into your trading routine. With time you get a better feeling for what helps your decision-making process and which things help you understand market context more effectively.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. 


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