When to go long & when to go short

Entry Signal

A few days ago I told you I am going to share my strategy with you, and I’m in the process… I started with this article, and then I wrote this one.

I have received a few emails asking my about the entry rules that I use… but don’t get impatient, I’ll get there… in fact, my next article about the strategy I think will be about my entry rules…

(If I don’t think about something else)

So we’ll get there… I just think that its very important for you understand a few things about the market and about the methodology before we actually go over it!

But I promise you something, by the time we get to the entries, you’ll have more answers than questions.

Sounds good?

Market Condition

What I’m going to write about today, answers one simple but probably the most important question about trading:

What am I going to do today with this currency pair or stock or commodity?

If you think about the possibilities here… you end up with different possible answers:

  • I will go long
  • I will go short
  • I will wait for the market to do something before I do something else
  • I have no idea of what the market is doing, therefore I wont trade it
  • If you think the market will move up, of course you are going to look for long opportunities, likewise if the market is likely to continue its way down, you’ll keep looking for short opportunities.

    By the same token, if you’d rather wait for the market to do something before taking any trade, you just wait until that “something” happens.

    And obviously, if you have no idea of what the market is doing, you know you are better off not trading it.

    So you need to know what the market is likely to do, so you can make your trading plan and adapt to the way the market is currently trading.

    That way, you will always be trading in the direction of the market condition and let me tell you something, if you always trade in the direction of the market condition, no matter what strategy you use, results will come (sooner or later).

    So, what is this “Market Condition”… This is how I define it:

    The market condition is the way the market reacts to the long term support and resistance levels.

    From one of my previous articles you know that one of the main principles of price action is that the market (most of the time) moves from one level to the other.

    The way we can explain those movements, from one level to the other, is what I call Market condition.

    Its important to remember that for now, we are talking about long term charts (4H, 1D and 1W). This is just the analysis that we do to determine if we are going to trade one instrument or not (our entry strategy, which we’ll discuss later on, it all about the short term charts).

    Ok, so, we have 4 types of market condition:

    • Bullish Market Condition (MC)
    • Bearish MC
    • At an important level
    • No clear market condition

    Bullish Market Condition

    When ever the market is trading in bullish MC, I know that the market is likely to continue its way up, and therefore I will only look for long opportunities (why on earth would I go short if I know the market is likely to continue its way up).

    There are two ways in which we can get a bullish condition: When the market gets rejected from and important Long Term (LT) support level and when the market breaks through an important LT resistance level.

    bullish condition

    So these are the two ways in which you can get a bullish condition.

    Its simple isn’t it?

    Unfortunately, sometimes real charts aren’t as easy as that image, so lets take a look at some images for both scenarios.

    Bullish Condition by Rejection

    In the chart above, its clear that the market was rejected from an important support level, therefore it is trading in a bullish condition. And it will remain bullish (likely to continue moving up), until the market reaches the next LT resistance level.

    It is now time to start looking for long opportunities in the short term charts.

    Bullish Condition by Breakout

    In this case, the market broke through an important LT resistance level, triggering a bullish condition. And again, the market is likely to continue to move up, at least until it reaches its next LT resistance level.

    Here again, I’ll be looking only for long opportunities (I will ignore all short signals).

    Are you with me?

    Bearish Market Condition

    When the market trades in a bearish condition, I know that it is likely to continue to move down, therefore I’ll only look for short opportunities (and ignore every long signal since I know it is likely to continue its way down).

    And again, there are two ways in which we can get a bearish condition: When the market gets rejected from an important LT resistance level and when then market breaks through an important LT support level.

    bearish condition

    And again, those are the two ways in which you can get a bearish condition.

    Now lets take a look at some real life examples.

    Bearish Condition by Rejection

    In the chart above, the market was rejected from an important resistance level, its half way down, but we still have enough room to take our trade.

    Since it got rejected from an important resistance level, I know it is likely to continue its way down, therefore I’ll keep looking for short opportunities at least until it reaches the next LT support level.

    Bearish Condition by Breakout

    In this case, the market broke through an important support level, when the market broke that level, it triggered a bearish condition, which means that we are going to keep looking for short opportunities.

    And I will ignore every long signal that might appear.

    At an important level Market Condition

    This one is the most tricky market condition… so please pay attention.

    This market condition refers to when the market trades at or near an important LT level.

    At this point, we don’t know whether the market is going to get rejected from there, or break through that important level.

    But hey, here is a little secret, we don’t need to know! We don’t need a crystal ball…

    We just need to patiently wait for the market to make up its mind, let it make its first move, then we’ll follow.

    That’s it! There should be no guessing involved, its all about following what the market is doing.

    I mentioned that this one was probably the most tricky market condition, and the reason why I think that its because sometimes we need to be very very patient, and wait for the market to make up its mind.

    Sometimes it might take a few hours, but it can take as long as a few months.

    So what’s the procedure here?

    Alright, I thought you might asked that question… so I prepared these two charts for you:

    At an IL LT

    When you see that chart, what’s the first thing that pops up in your mind?

    It looks like it was rejected from an important resistance level right?

    But thats not the case, when we take a closer look at that range, for instance, in the short term chart, we might find something different… take a look at it:

    At an IL ST

    In this chart however, its clear that the market is still trading around that level.

    So here is how it works…

    When the market trades near an important LT level, most of the time, it will range in the ST charts, so we need to take a look at the short term chart, mark our range, and define our trading plan:

    • If the market breaks through the upper ST resistance level, it will trigger a bullish condition (bullish condition, not a long trade).
    • If the market breaks through the lower ST support level, it will trigger a bearish condition (bearish condition, not a short trade)
    • For as long a the market keeps trading in between that range, I’ll stay on the sidelines.

    And that’s it, now you have a plan, you know what does the market need to do, so that you can start looking for trade opportunities.

    When you have a plan like this one, you are more likely to trade with discipline, which is what we all need to trade with consistent results.

    Crystal clear?

    No clear market condition

    This one is the last type of market condition, as its name implies, its got no clear:

    • Support & resistance levels
    • Market swings

    And its better to stay away from it…

    If you dont have clear S&R levels or clear swings, you’ll never know what the market is likely to do, it will be like random walk… and you dont want to get involved when the market moves like that…

    So at the end, its always about finding the right instruments to trade, the instruments with the right market condition, and always trading in the same direction.

    If you want to further explore these concepts, I recommend you to do two things:

    • Read 4 or 5 times my eBook (not 1 or 2)… Download it from here.
    • Read my blog, all my trades and analyses are based on this methodology.

    Your turn

    What do you think about the methodology?

    Do you have any question about any market condition?

    Would you add something else to the methodology?

    Please share your thoughts.

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Raul Lopez

I've been trading the markets for more than 15 years. I believe the best way to trade is by adapting to the market conditions. You can learn it too, join our community .

  • Onwuka Arisa

    Still patiently waiting for the article on your entry rules… Or have you already written it? Nice write ups

    • Raul Lopez

      Yep, I already wrote about it… look for my most recent posts! You’ll find my entry rules on breakout and retracement signals!

  • Aziz Dhamani

    Hello Raul,

    Thanks for all the info i am new to trading i understand above stratergy of going LONG or SHORT after checking instruments clear movements but i am confuse about how to determine LT Resistance or LT Support for any instrument to apply your stratergy on that instrument. Is their any site which gives at the start of the day what is instruments LT support or LT resistance for that day…….Hope my question make sense.

    • Raul Lopez

      Hello Aziz,

      You can download my eBook, in there you’ll find the rules I use to determine S&R levels… the best thing that you can do is to learn and practice, read my previous analyses/articles, you’ll find plenty of insight about S&R levels…

      Here is the link to download the eBook:

      http://www.protradingnow.com/free-forex-ebook/

      Good luck! And let me know if I can help you with anything else!

      • Aziz Dhamani

        Dear Raul,

        As news for NFP (USD News) is coming in 2 days any currency pair to look forward specially which have clear indication to trade during this Thursday and Friday to get maximum PIP benefit :-) Please guide

        • Raul Lopez

          Hey Aziz,

          Look, its very difficult to tell how is the market going to react to fundamental releases, specially around the most important ones, like the NFP…

          So the best thing to do is, to hold your trades if you have a good amount of pips on your favor, and if you dont, you are better of closing everything.

          Good luck!

  • Varahala Babu

    hi raul…can we still go long on cad/jpy at the current price 95.00

    • Raul Lopez

      Hello Varahala,

      I wouldnt recommend you to do so!

  • Anuar

    Hai Raul..great informations…great knowledge…and great person you are…
    thanks for all the lessons given … we were all still hungry and need lessons from people like you …Thanks Man

    • Raul Lopez

      I’m glad it has been useful! Let me know if you have any question about it!

  • taufic

    GOOD ARTICAL ….SIR

    • Raul Lopez

      Thanks Man!

      Let me know if you have any question about it!

  • Donald Schnell

    Thank you for this clear instruction Raul! Superb job as always.

    • Raul Lopez

      No problem Donald, Let me know if I can help you with anything…