The Basic Market Paradigm of Trading

The market is a battlefield of buyers and sellers slugging it out at various price levels. Although it is not perfectly accurate, you may think of each chart time frame as a different level of buyers and sellers in mortal combat. The market is the combined interplay of all of them. The current price is essentially a very temporary truce. It is a result of all the previous battling, the price about which buyers and sellers agree to continue to disagree.

In a downtrend, it is seller thrust followed by buyer parry followed by seller thrust.

In an uptrend, it is buyer thrust followed by seller parry followed by buyer thrust. In a sideways market, the thrusts and parries vary and neither side makes headway with respect to a trend.

Keep in mind a trend is relative to a time frame. What is a trend at one time frame or price level is a sideways or trading market at another—and vice versa. Everything, and I mean everything, in the market is a 1-2-3 of thrust-parry-thrust. The chart you see is the interaction of 1-2-3s at multiple price-time levels. For me, it has always been the fundamental chart component. All other components, formations, and patterns are interactions of the primary 1-2-3. See Figure below.

[caption id="attachment_13197" align="aligncenter" width="550"]Thrust-Parry-Thrust, a 1-2-3 Thrust-Parry-Thrust, a 1-2-3[/caption]

This thrust-parry-thrust leads directly to the basic market paradigm (BMP) for trading any market, including currencies. The logic of this is intuitive:

  1. The trend is your friend. You want to always go with the trend. (Identify the trend.) This is the 1 thrust.
  2. Prices do not move in one direction without corrections of some magnitude. You do not want to buy at the top or sell at the bottom. (Wait for a correction.) This is the 2 parry.
  3. Let the market tell you when the correction is over. (Enter as soon as the trend is reestablished.) This is the 3 thrust.
Tip: You may—you must—refine this framework, and build on it, but you should never deviate from it. Anything that abrogates or negates the BMP is a mistake and will eventually lead you down the wrong road. A simple trading method in accordance with the BMP is better than a complicated trading method that ignores it.

An old market adage—perhaps the best one of many of them—states "The trend is your friend." Very true. The trend may be your friend but the basic market paradigm is family.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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