When looking for a trading system to implement, there are two basic types. There are the trending types of systems and the ranging types of systems. A trending system is one where you are looking to first identify the trend or the direction that the price action is moving, then enter a trade once the momentum begins to move back in the direction of the trend. A ranging system is one where you would be looking for the price action to be in a sideways, non-trending movement. With a ranging market you would be looking to trade as the price bounces up and down, in-between the upper level of resistance and the lower level support. Take a look at both of these types of market conditions below.
Trending Markets
With a trending system you would look to the trend to identify if you were going to be buying or selling the pair. In this case we would be looking to buy as the trend is up. The other things trend traders do is to look for the area of support or resistance as the place where they will be entering into their trades. In this example, where the trend is up, we would wait for the price to pull back to support in order to look for the entry. If the trend were down, we would be looking for a move back up to the resistance area to look where we might want to short the pair.
Ranging Markets
In this chart above you can see an example of a pair that is moving sideways. I have outlined the support and resistance areas with the red and green line. Likewise, with a ranging market, we would be looking to trade as the price bounced up and down off of these areas for our entry.
Of course there are many different ways to trade these two and many different indicators that we can use to help with our entries, but when it comes down to it, most systems are going to look at these two types of entries.
Another type of entry system that works on both trending markets and sideways markets is the breakout trades. This can be in the form of price patterns such as flag, triangles, double tops, Head and Shoulders or in just defining support and resistance on the chart and looking for the price to move beyond them.
A breakout trade is one in which the support and resistance areas have been defined by lines drawn on the chart and where the entry happens as the price moves above or below these lines. Knowing where to draw these lines is an important part of trading breakouts. If we draw them too close we end up getting filled and then whipped out of the trade or if they are too far away, we end up getting filled at a price that is too far from the breakout and the price may retrace a bit.
Regardless of what type of entries you are looking for, you will find that they are likely to fit into either the category of a trend trade or a range trade. Take some time to look at what you are trading and how you might improve your trading by identifying the type of entries you are looking for.