Friday, April 21, 2006

In Forex - The Trend Is Our Friend

The Trend is our friend?

This an old adage when it comes to trading. Whether it is Stocks or Forex, it still holds true. But what do we mean exactly?

Simply this, it’s better to go with a trend than against it. To truly get the benefit of this strategy we need to be able to recognize and interpret the trend. This can take the form of reading charts and Candlestick patterns. - without a doubt one of the most basic but important skills to acquire in Forex trading.

A currency pair can be trading sideways, up or down - and if we can read the signs we can make money in all three of these situations.

If we understand what we are seeing we can make a deliberation on the probable outcome of the emerging data. A trend needs at least 3 points of reference to be relevant.

There are various trends and Forex chart patterns to be aware of. These give us, as traders, a probable indication of direction in the future.

When we add the charting knowledge to our growing understanding of Japanese candlestick formations – we are starting to acquire some powerful prediction tools.

In an upward trend, our trendlines are sitting on successive higher lows or higher highs. Although in real trading the lines are rarely tidily drawn! As seen in this image

Upward trend.

The bottom line is showing us the support points of our current trend. The top line is showing us the resistance. In an upward trend our support point is constantly rising and our resistance price point is constantly rising also.

We must also look at the steepness of our trend. An upward trend with a very steep incline is usually very short lived – hopefully it doesn’t die before we’ve taken advantage!

Further Japanese Candlesticks - The Doji

The Doji candlestick is interpreted as a sign of pending reversal. There is no real body, as the opening and closing prices are in close proximity. This means neither the Bulls or Bears have the upper hand.
As a word of caution, we should always have a further confirmation before acting on the Doji.
But, when added to other indicators and other candlestick patterns the Doji can be a powerful indicator. For example, if our current trend is up – we need a closing price below the close of our Doji to confirm that the trend is in-fact reversing.

More next time. Cashmaster Out.
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