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As one of the FX Power Course instructors, I get to talk to new and experienced traders on a daily basis. Many times these traders talk about trading systems they wrote themselves that worked for awhile and then mysteriously stopped working. They assumed that there was something wrong with their system, so they moved onto another approach. But the problem may not have been the system, but rather that the market environment had changed and the trader did not recognize it.
This happens quite often and is one of the main reasons that good trading systems get tossed aside. So to keep this from frequently happening, the first rule of any trading system should be one of the oldest pieces of advice from many experienced traders.
Always trade in the direction of the trend. If the market is in an uptrend, only look for buying opportunities and if the market is in a downtrend, then only look for selling opportunities. This would seem as obvious as knowing that walking downhill is easier than walking uphill, but yet traders get so caught up in looking for that perfect entry, that they forget to take a step back and take a look at the big picture, which is the direction of the trend.
Quite often the best approach in trend analysis is to create a daily chart of the EUR/USD with one year of trading activity and make a note of your opinion of the trend. You then work your way through all of the other currency pairs to do the same. You can then compare to see which pairs are in the strongest uptrends and strongest downtrends. These would be the currency pairs to use when looking for a trade. You should be very picky as your trading results will depend on your choices.
Since you also have a directional bias based on the direction of the trend, the process of finding a trading opportunity becomes a little easier. For those of you who like to quantify your choices, we have posted a daily chart of the EUR/USD with three months of trading activity. Also plotted on the chart is the most popular of all technical indicators, a 200-day Simple Moving Average.
Note that all of the candles are above the moving average. This is an example of an uptrend. If all of the candles were below the moving average, then this would be a downtrend. If candles were both above and below the moving average, we would consider trend weak and not trade that particular currency pair. You can use any moving average value on any time frame chart, but the technical analysis on the longer-term charts are more reliable, with the daily chart being the best. But by quantifying it like this, we are each able to find what combination works best for our own system. That is what using a system is all about. Next week we will look at the activity within a trending move to find a trading opportunity.
Thomas Long, FX PowerCourse Instructor
FXCM
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