One of the things we try to impress upon students taking one of the FXCM Power Courses is that identifying a trade is a multiple step process. Too many new traders pull up an hourly chart plotted with a variety of technical indicators in an attempt to find a trade.
I think this misses what might be the most important step in trading, which is to always trade in the direction of the trend as seen on the daily chart. If the daily chart shows an uptrend, then we only want to look for buying opportunities. If the daily chart shows a downtrend, then we only want to look for selling opportunities. If the daily chart shows a range bound market, then we want to buy above support and sell below resistance.
If we are not sure about the trend, we simply move onto another currency pair where the trend seems obvious. The advantage of adopting a directional bias is that it keeps us on the momentum side of the market, which means we don’t have to be exact in our entry or exit to profit. This bias also puts us in a position to be in on some of the big trending moves that the FX markets are known for.
After having identified the trend on the daily chart, we can then move down to an intraday chart to pinpoint our entry and exit. This time we know whether we want to buy or sell, which can make all the difference in the world in our profitability. We can take a look at a few examples of the trend of the market in the next couple of lessons, but first let’s look at how we identify an uptrend, a change to a downtrend and a downtrend.
This is a daily chart of the USD/CAD. The chart starts with the market in an uptrend, which is a series of higher highs and higher lows. Then we can see the uptrend changed to a downtrend when the market traded down through the previous low. Then we see a downtrend, which is a series of lower highs and lower lows. The idea is to pick the strongest trends or most obvious range bound situation when looking for a trade. Be very picky about the pair you choose to trade and you increase your chance of success.
