Pre Market Trading - Momentum vs Patterns
Pre market trading can refer to different markets, but here the reference is to the Forex market, that is the time before a particular market session opens. Pre market trading can be a time when the market starts to pick up and evidence patterns driven by momentum. In quiet times, the market may also show a wide range of patterns but with reduced volatility, these patterns can seem particularly devoid of cause, that it their appearance seems random. This can make trading in this pre-pre market time of interest.
However as the session approaches, then liquidity can be expected to increase. In may be the case that patterns from previous sessions start to become more apparent, that is effects of for example news releases can have a reprise in the next session. Patterns may be defined in a very general way in the Forex market, as it is driven by patterns but has a complexity which provides the potential for different patterns at a given time. This makes it both tradable and hard to trade. So the effect of increased liquidity can drive previous patterns or may create new ones.
One generalised pattern is a trend and liquidity can help with trend formation and augmentation, but ones driven by momentum and which can be unstable. Patterns can also be determined to some extent by factors such as events in other markets and these can also be unstable. Forex patterns have perhaps an inherent instability as the market can at any time reverse and change into something new. So reinforced by liquidity to the extent that is possible and in a volatile environment directional moves may be seen in pre market trading, that is closer to the run up to open.
However all this can change as the opening approaches, and complex volatility comes into play. Indeed the momentum driven trading can turn at open into different kinds of patterns which may require a different approach to trading. Thus the structuring given to the market by the trading session, before, at and during the session, and from the sessions before may need to be considered.
One way to approach pre market trading is to use candlesticks. This is because this chart price type can represent momentum, direction and the potential for changes in patterns. The 5 minute chart may be examined for build up in momentum, and the 1 minute chart for changes in patterns. That is the 1 minute chart may at least point to what the momentum can do, by virtue of the kinds of patterns it is tracing out (for example, if the 1 minute chart is showing a trend end, how will liquidity driven momentum drive this pattern). So a pre market strategy can be one based on reading patterns forming on short term time frames, taking into account that liquidity is driving a market which may still be affected by pattern formation from the previous session, but which may take an apparently entirely new tack when the session begins and unfolds.
