Rafael Anderson Gonzales Mendoza via Flickr
“The trend is your friend, until it bends at the end” is one of the most popular, overused, misunderstood and misapplied statements used in the FX trading community. Similar to many statements we see in FX, it deserves more scrutiny, rather than be accepted unquestionably at face value. The statement is popular because it’s gained an undeserved reputation, similar to that you’d see on t-shirts worn in gyms; “no pain, no gain”, “your biggest opponent is you”, hollow, glib, one liners.
According to research supposedly conducted by many analysts, markets only trend 20% of the time, apparently, the rest of the time they’re ranging. Similar to the “trend is your friend” statement, this 20% claim is impossible to prove. It becomes unchallenged folklore, accepted trading wisdom. It’d be a challenge for any traders to do their own research and discover from where the robust, back tested evidence exists to support this claim.
Is one trader’s trend another trader’s range? We can all identify trends, the point at where they end and begin. It’s very simple isn’t it? We simply plot the movement off a daily chart, use our weekly time frame to identify longer term movements and the four hour time frame to identify shorter term movements. In doing so, we can laser focus in on the precise turning points… except, we can’t. Many traders will determine that the daily and weekly time frames are too high to trade off. They’ll steadfastly contend that the four hour is the chart to trade off and the one hour time frame and the eight hour should be the timeframes to support their decision making.
Identifying Trends
Identifying trends and potentially trading them has become one of the most discussed issues in trading for one simple reason; retrospectively, they’re so easy to identify. We can all pull up a chart of for example cable (GBP/USD) and pinpoint the (supposed) trend turning points during 2016 and early 2017, so why not do it now as we talk you through this article?
We can start with a daily chart and pinpoint the June referendum decision collapsing the currency pair’s value. We can then clearly identify a recovery (of sorts) from mid August to September, then a sudden fall in October, another recovery from November to December. Mid December to January 2017 saw the beginnings of another sell off, with the thirty one year lows witnessed in October 2016 being retested. Over the past two weeks (late January 2017) we’ve seen a recovery, then a fall.
We’ve chosen to concentrate on cable for two reasons. Firstly; the move (as the majority are in FX) was entirely driven by fundamentals, you couldn’t have a clearer example. The UK’s referendum decision and the subsequent narrative has caused the moves, price has not reacted to reaching a technical point on a chart. Secondly; despite the fact that we couldn’t have a clearer example of a: huge, fundamental, historical, rarely repeated move, the potential trend trade hasn’t proven to be as easy to identify and harvest pips from as many would imagine. With hindsight, you’d have stayed short until mid October, and currently be out of the market after the thirty one year low printed. Or perhaps you’d have gone long on January 16th and currently banked circa 500 pips, still long whilst awaiting the outcome of the UK’s parliament discussions taking place this week.
If you’d shorted cable (GBP/USD) from June 23rd – June 24th when would you close the trend trade, would you still be short? Would you have re-entered short after the ranging periods had expired, what days/weeks would you identify as the ranging periods?
Trend Trading
In this short article we can’t possibly discuss the full features, benefits and pitfalls of trend trading. Similarly our intention is not to deter you from (arguably) the most logical, efficient and profitable method of FX trading. Our purpose is to highlight that only in hindsight does trended trading look simple, given that the chart patterns are generally so clear. However, the same challenges, primarily regarding tight money management remain, irrespective of your trading style and decisions. And when you’re faced only with white space on the right hand side of your chart representing the future, it’s never predictable.
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