Finding Trends in Trendless Markets - Part 1

04/29/2014 9:00 am EST

Focus: FOREX

Jeremy Wagner

Head of Daily FX Education, FXCM

Most inexperienced traders lose money because they don't adapt their trading strategies to fit current market conditions, so Jeremy Wagner of DailyFX Education offers one way to correct that error.

A few weeks ago, we published an article on trendless markets and three common mistakes. The first common mistake made is that traders keep trading their trending strategy on a market that is not moving. To correct that mistake, you need to apply your trending strategy to a strongly trending market.

For the past couple of weeks, the EUR/USD has been trading in a very tight sideways range. The range from high to low seen last week was the second lowest range in seven years! If you were applying a trend following strategy to the EUR/USD, you would have likely taken on losing trades.

To correct this mistake, we need to look for strong trending markets.

Want to take a guess on which currency pair has been in one of the strongest trends since the beginning of the calendar year 2014?

It's a market that most traders have been interested in, yet few have likely traded it. The Chinese yuan!

Chinese Yuan is One of the Strongest FX Trends of 2014

chart
Created using FXCM's Marketscope 2.0 charts
Click to Enlarge

At the start the 2014 calendar year, the USD/CNH traded at 6.0563. China still has tight controls on how much they will allow the exchange rate to fluctuate. Despite those controls, the exchange rate has been on a steady march higher meaning the yuan is weakening against the dollar.

What makes this story even more interesting is that against the main currencies, the US dollar has been weakening lately.

Therefore, if the yuan is weakening against the buck, and if the buck is weakening against other currencies like the euro, Great British pound, the Australian dollar, or the Japanese yen, then that means the yuan is one of the weaker currencies in the world for 2014.

How Do you Trade the USD/CNH?
First of all, you need to pull a chart on the pair. Near the current price level of 6.25, there is a chance this trend may pause and dip. The price is currently trading at levels not seen in the past 20 months. It took 16 months for the price to trend lower, and only four months to trade back up. This has been a powerful up move.

The move is starting to capture attention of speculators. Many analysts have called the 6.25 price level a key zone that if followed through higher, could spur on a risk-off environment.

Strong trends need time to catch its breath. We are also near the 61.8% retracement of the previous down trend. So be cautious the pair may drift lower. The dip lower may offer an opportunity to buy at lower levels.

By Jeremy Wagner, Head Forex Trading Instructor, DailyFX Education

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