The Three Market Conditions
It doesn’t matter what you’re trading – stocks, futures, currencies, commodities, etc. – the markets can only move in one of three ways:
• TREND (meaning prices move in the same general direction – up or down – over a period of time).
• COUNTER-TREND (also known as a “sideways market”, this is a situation where prices change little and move in a range over an extended period of time), and.
• BREAKOUT (this occurs when prices “break-through” to a new high or to a new low.
And this idea of the “3 market conditions” is nothing new
It was first talked about by French mathematician Louis Jean-Baptiste Alphonse Bachelier (often referred to today as the “Einstein of Finance”) in his 1900 PhD thesis, the Theory of Speculation in which he said:
“Random noise [i.e. counter-trending] is what defines the normal market behavior. There are only two other types of market movement that are outside of the zone of random noise: market spikes [i.e. breakouts] and trends.”
So the concept here is this: Most of the time the markets bounce around in a counter-trend mode, and occasionally it will move into a trending mode or breakout (i.e. “spike”) to a new high or a new low. It’s just how the financial markets work!
And it continues to hold true today in every market, every instrument, and every timeframe!
The 60:30:10 Principle Explained
Here’s an important secret about the Forex (or any other financial market for that matter) that you may be surprised. On average, the markets are in a trending mode only about 30% of the time, breakout mode only about 10% of the time and in a counter-trend, or ranging mode about 60% of the time.
This “60: 30: 10 Rule” exists across all markets and all time-frames!
So in other words, it doesn’t matter if you’re trading on the 15 minute chart or stocks on a one day chart, the results will be the same:
Trend: 30%
Breakout: 10%
Counter-Trend: 60%
And whether you realize it or not, it’s that 60% column (the counter-trend mode) that is the reason you’re not as profitable as you should be.
Putting the 60:30:10 Rule To the Test
If you want to test the 60:30:10 ratio for yourself, simply place a Bollinger Band (or any other trend indicator) on any chart for any time-frame.
Then, add up the candlesticks where the market was in a trending mode (i.e. the bar breaks above or below the band) and divide it by the total number of bars in the trading period and you’ll have your “trending average”.
This screenshot gives you an example of how the “trending days” number was calculated. A simple Bollinger Band breakout system was used to determine when a pair was in a trending mode, and the candlesticks were added together to get a total number of “trending days” for the year. This number was then divided by the total number of trading days (240) to get the “trending average”.
In this example a total of 80 bars was counted that were in a trending mode, so out of the 240 trading days in 2008, the market was in a trending mode 80 of those days or 33% of the time.
If we use the same method to calculate the total number of breakouts for the GBP/USD in 2008.
Below is a screenshot of how the trending average is calculated on the GBP/USD for 2008 on the daily chart:
In this screenshot lets tally the number of “breakout days” for the GBP/USD in 2008 on the day chart. In this example lets use the Price-Action Channel set to “20” to determine breakouts because it’s a fairly well-known breakout indicator (that was also made famous by the “Turtle Traders”). You’ll find, however, that virtually any indicator you use to determine trends and breakouts will still return a 60: 30:10 ratio.
Using this method, its been found that there were a total of 23 breakout days out of a totally of 240 trading days, yielding a breakout average of 9.6% for the GBP/USD in 2008.
GBP/USD
Trend: 80 days (33.3%)
Breakout: 23 days (9.6%)
Counter-Trend: 137 days (57.1%)
It doesn’t matter what you’re trading – stocks, futures, currencies, commodities, etc. – the markets can only move in one of three ways:
• TREND (meaning prices move in the same general direction – up or down – over a period of time).
• COUNTER-TREND (also known as a “sideways market”, this is a situation where prices change little and move in a range over an extended period of time), and.
• BREAKOUT (this occurs when prices “break-through” to a new high or to a new low.
And this idea of the “3 market conditions” is nothing new
It was first talked about by French mathematician Louis Jean-Baptiste Alphonse Bachelier (often referred to today as the “Einstein of Finance”) in his 1900 PhD thesis, the Theory of Speculation in which he said:
“Random noise [i.e. counter-trending] is what defines the normal market behavior. There are only two other types of market movement that are outside of the zone of random noise: market spikes [i.e. breakouts] and trends.”
So the concept here is this: Most of the time the markets bounce around in a counter-trend mode, and occasionally it will move into a trending mode or breakout (i.e. “spike”) to a new high or a new low. It’s just how the financial markets work!
And it continues to hold true today in every market, every instrument, and every timeframe!
The 60:30:10 Principle Explained
Here’s an important secret about the Forex (or any other financial market for that matter) that you may be surprised. On average, the markets are in a trending mode only about 30% of the time, breakout mode only about 10% of the time and in a counter-trend, or ranging mode about 60% of the time.
This “60: 30: 10 Rule” exists across all markets and all time-frames!
So in other words, it doesn’t matter if you’re trading on the 15 minute chart or stocks on a one day chart, the results will be the same:
Trend: 30%
Breakout: 10%
Counter-Trend: 60%
And whether you realize it or not, it’s that 60% column (the counter-trend mode) that is the reason you’re not as profitable as you should be.
Putting the 60:30:10 Rule To the Test
If you want to test the 60:30:10 ratio for yourself, simply place a Bollinger Band (or any other trend indicator) on any chart for any time-frame.
Then, add up the candlesticks where the market was in a trending mode (i.e. the bar breaks above or below the band) and divide it by the total number of bars in the trading period and you’ll have your “trending average”.
In this example a total of 80 bars was counted that were in a trending mode, so out of the 240 trading days in 2008, the market was in a trending mode 80 of those days or 33% of the time.
If we use the same method to calculate the total number of breakouts for the GBP/USD in 2008.
Below is a screenshot of how the trending average is calculated on the GBP/USD for 2008 on the daily chart:
Using this method, its been found that there were a total of 23 breakout days out of a totally of 240 trading days, yielding a breakout average of 9.6% for the GBP/USD in 2008.
GBP/USD
Trend: 80 days (33.3%)
Breakout: 23 days (9.6%)
Counter-Trend: 137 days (57.1%)
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