Simple Steps for Identifying a Trend

10/17/2011 9:43 am EST

Focus: STRATEGIES

Raghee Horner

Author, Forex Trading for Maximum Profit

Raghee Horner discusses a simple, proven method for traders in all markets to use moving averages to find the prevailing trend.

We’re talking about trend spotting today with Raghee Horner, and Raghee, tell us, how do you go about spotting trends in the forex market?

Trends for me really were inspired by my readings of Charles Dow. If people have read Dow Theory or read anything that Charles Dow has written, you know that he talked about four different market cycles.

They really respect what the market psychologically is feeling about any pair, any stock, about any futures contract; it’s not just about forex. In terms of trends, he would call the “markup” or “markdown;” he really didn’t talk about markdown, because stocks have a bullish bias, and in forex we play shorts and longs.

To get to really what I’m doing with the trend, I use something called a 34 EMA wave; it’s three very simple-to-set-up moving averages. It’ a 34 period exponential moving average (EMA) on the high, the low, and the close. Those are Fibonacci-based moving averages. I’m a big Fibonacci freak and I really believe in that number.

What I do is I look at the way it’s traveling across the chart. Is it moving up at an angle? Is it behaving as support or resistance? I use that as a visual footprint to what I think the market psychologically is telling me in terms of price.

Does this methodology accommodate different trading styles, or even people who live in different time zones?

In terms of trading styles, I think anybody who has the basket of strategies that they’re using, the first step must be “What is the market telling me I should do with it?”

In other words, let the market dictate your strategy. A lot of people say “I’ve got this great scalping strategy I want to use it on the market.” The truth of the matter is you really should find the right environment for that strategy, and say “Well, I’ve got a trend-following strategy, wouldn’t it be nice to start off with a trend instead of a sideways market?”

If I’ve got a sideways market, what kinds of tools—in terms of indicators and strategies—can I apply to that type of environment?

How about people who live in different zones around the world?

Time zones, sure. I’ll even break it down into what time of day you trade.

If you’re a trader that comes home after work and you find the Asian session is available to you, or maybe you’re one of those insomniac traders and you like trading the British market open, the European market open, whatever it may be, you can look at the rhythm of the trading day.

Consider the 24-hour trading day into one-hour chunks, and ask yourself when the flow is coming into the market, and when is it leaving the market?

You’ll find that there are spikes at 2 am and 3 am Eastern Standard Time, again at 8 am, and things drop off for Asia, so if you look at the Bank of International Settlements and the study they had for the past three years, you’ll see that Asia only accounts for about 10% of daily turnover, and that means you should really look at your expectations differently for Asia than you would for, say, Europe and the UK.

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