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The Trend is Your Friend!

By James B. Stanley
29 September 2011 18:38 GMT

The Trend is your Friend!

By James B. Stanley

If you ask a hundred professional traders their strategy, you’d likely get a wide-range of responses. One of the best parts of markets, the fact that there isn’t JUST one way of being a profitable trader – can also be one of the most difficult for new traders to grasp.

Observing a chart can lead to numerous ideas, one of which may give traders a clue for how they want to approach the market. Let’s take, for instance, the Daily chart of EUR/USD below:

New_document_1_body_Picture_1.png, The Trend is Your Friend!

Created with Marketscope/Trading Station 2.0

Going back to price action taking place in April of 2009 (the beginning of box 1), I’ve identified 5 distinct periods on this chart.

What do these periods have in common?

One of the traders’ best friends – the trend is moving in one direction; creating a clean, smooth movement with which I, as a trader, can look to trade.

In Box 1 – the rampant run-up on the Euro – I want to look to play Long positions ONLY. Could short positions have worked out in Box 1?

Maybe.

But the bias appears to be to the upside (as price is continually thriving higher). As a trader, I want that or any potential biases that may be in the market to work in my favor, so I’m only going to look to trade long positions during Box 1.

This strong uptrend leads us into Box 2, which is a reversal of the previous up-trend to the downside.

In Box 2, now we have clean movements to the downside. Just as we had above – it appears that the bias is to one side (however this time the bias is to the downside as opposed to the upside).

Now, just because we have a clean trend, it doesn’t mean that ALL price action will be to the downside. There will certainly be days in which price goes up – we’re just looking for the general trend; the tide of the ocean.

After an extended run in Box 2, price finds support, and eventually moves back up (in Box 3). Although this movement is relatively short-lived compared to what we were seeing in the previous 2 trends, we have the same strong movement in one direction that can give me a potential way of playing the trend.

Boxes 4 and 5 give us more of the same thing: Price moving with what appears to be a concerted bias in one direction, and this is where traders can look to stage their approach.

While the future is unpredictable, and nobody knows what the next price will be, trading with the trend can bring numerous potential benefits to the traders’ approach.

One of the beautiful parts of the FX Market that doesn’t exist in other markets – with over 40 currency pairs available, there is almost always a clean trend SOMEWHERE that can be traded.

Thank you very much for your time, and Happy Trading!

Additional resources regarding Trend Trading:

Trend Trading Lesson 1

Multi-Time Frame Analysis

James Stanley contributes to the Instructor Trading Tips of DailyFX.

You can follow James Stanley on Twitter @JStanleyFX.

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29 September 2011 18:38 GMT