4 Keys to Profitable Forex Trend Trading

Unlocking the Profit Potential of Trending Currency Pairs

Christopher Weaver

• Publisher: Harriman House
• Year: 2012
• Print ISBN: 9780857190895
• eBook ISBN: 9780857192080
• Edition: 1
• Topic: Business
• Subtopic: Stocks
• Index: Business

The forex market is huge, and the potential to make money from it immense, but how should you structure your trading in order to profit from it? Technical analyst Christopher Weaver shows you how to improve your trading of trending currency pairs using trend lines, channels, Fibonacci retracements and symmetrical triangles.These are the four keys to making money trading forex. And this is no surface guide; the author explores in-depth how every key works, why they are useful, their different variations, and, most importantly, two practical strategies for each which take full advantage of their strengths.The concepts behind the keys can sound mysterious, but Christopher lays bare their workings with plain English and sharp insight. Fully illustrated with charts and examples, this is a unique and essential guide to making successful trades in the most exciting market out there.

Key 1. Trend Lines

A trend line is one of the most commonly used tools in technical analysis. However, while most traders know what this tool is, not so many know how to use it to implement an effective trading strategy. More often than not, traders draw a single trend line, which is used to highlight historic price action rather than to project a probable future.

Because of this, the trend line has come to play a minor role for many traders in setting market entries and exits. People have overlooked the simplicity of the trend line in favour of more complex indicators and systems. This is a shame as they are missing out on a powerful tool.

In this chapter, I am going to explain trend lines by defining their characteristics, by discussing different types of trend lines, and showing how they can be used to project future trading zones. We will also look at the power of using trend lines to pinpoint exact entry and exit prices.

The Theory

Primary strength: tells you whether to buy or to sell

A trend line shows which way the currency pair is trending and reveals the current market sentiment of the pair. The market sentiment is revealed by the direction of the trend line. If the trend line is moving up, then the market feels that the base currency (the first currency in the pair) is stronger than the terms currency (the second currency in the pair).

If the pair is trending up then we are likely to buy, if it is trending down then we are likely to sell. Knowing this up front, before considering the entry and exit points of the potential trade, puts you in a good position to effectively analyze a particular currency pair. Once your trend line is drawn and you are sure about your intention to either buy or to sell, you can move on with confidence and begin looking for possible places of entry into a position.

Another important benefit of trend lines is that they allow us to spot key turning points in the price action. A key turning point is a moment where the price action changes direction, forming either a peak or a trough. As we will see in this chapter, identifying these turning points creates effective entries in the market.

Some practicalities

In this book the price action, which is the plotted history of the exchange rate fluctuations, is shown by using candlesticks. The most basic of charting software will have a trend line option that can be used to highlight trend lines when they occur.

While it is true that each chart can present many different trend lines and can therefore be highly subjective, the goal for the trader is to identify the most obvious one. This is because our trading decisions must be based on information that the larger market moving traders, such as banks and large funds, are considering. The more eyes that see these trend lines, the more trading that takes place based on them and the more this happens the more likely they are to cause the desired reaction to the price action.

Trend lines can be drawn on any time frame. In this book, however, the shortest time frame chart we consider is the 15 minute chart and the longest is the daily chart. This is because trend lines drawn on anything less than the 15 minute chart tend to breakdown too often and are therefore unreliable to trade with. While charts longer-term than daily do not produce enough trading opportunities and can become outdated. The effect of being able to draw trend lines on a number of different time frames is that the amount of potential trading opportunities is very large.

Basic trend line characteristics

A trend line has two major characteristics,

1. it has a minimum of three touches with the price action, and
2. it is angled and not horizontal.

The requirement for three touches is a generally accepted rule in technical analysis. Two touches are more likely to be just a coincidence. With that in mind, the more touches there are the stronger the trend line.

The trend lines in the following charts demonstrate both of the required characteristics.

Figure 1.1: example of a simple, single-sided trend line

Figure 1.2: example of a simple, single-sided trend line

After examining the previous charts, you should be able to recognize how the presence of a clear and established trend line can enhance your trading profitability. When a trend line is pointing up, as it is in Figure 1.1, you will be considering long entries; when a trend line is pointing down, as it is in Figure 1.2, you will be considering short entries. To do anything else would be trading against the trend, and is likely to decrease your probability of success.

Later in this chapter we will identify which significant points on the chart provide you with the most efficient entry in relation to the trend line. Before we do that, there are a few more concepts regarding trend lines which you need to understand.

Trend line types

The basic trend line shown in Figure 1.2 is a simple concept which people generally find easy to identify. This basic approach, however, is insufficient, leaving you wondering how far back on the chart to go in search of trend lines and which trend line to use if you identify more than one.

Answering these questions is a matter of understanding the difference between major and minor trend lines, the impact that key moving averages have on trend lines and differentiating between the single-sided trend line and the double-sided trend line. The following sections of this chapter will do just that.

Single-sided trend lines

A single-sided trend line (like those in the previous figures) are called single-sided because the price action is only on one side of the trend line.

• If the price action is going up, the trend line is beneath it. One can think of the trend line as holding up th...

Table of contents

• Cover
• Publishing details
• Preface
• Introduction
• Key 1. Trend Lines
• Key 2 . Channels
• Key 3. Fibonacci Retracement Levels
• Key 4 . Symmetrical Triangles
• Using the Keys Effectively
• Conclusion