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Learn Forex: Finding Trends in Trendless Markets (Part 1)

Learn Forex: Finding Trends in Trendless Markets (Part 1)

2014-04-25 03:09:00
Jeremy Wagner, CEWA-M, Senior Strategist
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Talking Points:

  • Use a trend following strategy on a strong trending market
  • Chinese Yuan has been one of the strongest trends of 2014
  • Price may dip as we are at significant resistance, look to buy the dip

A few weeks ago, we published an article on trendless markets and three common mistakes. The first common mistake made is that traders keep trading their trending strategy on a market that is not moving. To correct that mistake, you need to apply your trending strategy to a strongly trending market.

For the past couple of weeks, the EUR/USD has been trading in a very tight sideways range. The range from high to low seen last week was the second lowest range in 7 years! If you were applying a trend following strategy to the EUR/USD, you would have likely taken on losing trades.

To correct this mistake, we need to look for strong trending markets.

Want to take a guess on which currency pair has been in one of the strongest trends since the beginning of the calendar year 2014?

It’s a market that most traders have been interested in, yet few have likely traded it. The Chinese Yuan!

Learn Forex: Chinese Yuan is One of the Strongest FX Trends of 2014

Learn Forex: Finding Trends in Trendless Markets (Part 1)

At the start the 2014 calendar year, the USD/CNH traded at 6.0563. China still has tight controls on how much they will allow the exchange rate to fluctuate. Despite those controls, the exchange rate has been on a steady march higher meaning the Yuan is weakening against the dollar.

What makes this story even more interesting is that against the main currencies, the USDOLLAR has been weakening lately.

Therefore, if the Yuan is weakening against the Buck, and if the Buck is weakening against other currencies like the Euro, Great British Pound, the Australian Dollar, or the Japanese Yen, then that means the Yuan is one of the weaker currencies in the world for 2014.

Suggested Reading: 2 Reasons to Sell USDOLLAR

How do you trade the USD/CNH?

First of all, you need to pull a chart on the pair. The USD/CNH is available to trade in your live FXCM account. If you don’t see the pair in your dealing rates, you may have to subscribe to it by clicking on the SYMBOLS button at the top of the Trading Station Desktop.

Near the current price level of 6.25, there is a chance this trend may pause and dip. The price is currently trading at levels not seen in the past 20 months. It took 16 months for the price to trend lower, and only 4 months to trade back up. This has been a powerful up move.

The move is starting to capture attention of speculators. Many analysts have called the 6.25 price level a key zone that if followed through higher, could spur on a risk off environment.

Strong trends need time to catch its breath. We are also near the 61.8% retracement of the previous down trend. So be cautious the pair may drift lower. The dip lower may offer an opportunity to buy at lower levels.

Suggested Reading: 3 Steps to Buy the Dip or Sell the Rally

Try this strategy on the USD/CNH in your demo account. Enroll for a free practice account to practicing trading the Chinese Yuan. That way, you can trade the pair live when you are comfortable for doing so.

Good luck and happy trading!

Additional Reading: Finding Trends in Trendless Markets Part 2 - EUR/CAD

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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