Trade Forex Trends in 2 Clear Steps

11/10/2011 9:38 am EST

Focus: FOREX

S. Wade Hansen

Founder and Managing Partner, Learning Markets

Wade Hansen advises starting with important fundamental drivers of a currency pair and then using a clean chart without excess indicators when trading short- or long-term FX trends.

Today we’re talking about currency trends with Wade Hansen.  Now Wade, what are some of the best ways for traders to spot some of these trends?

We address this question a lot in our book, All About Forex Trading, and there are a few different ways. We like to take a varied approach. We start with the fundamental analysis, knowing what key drivers may be pushing a currency to either become stronger or weaker. 

Then we’ll look at the charts. We know the fundamental foundation, but how are traders reacting to those fundamentals, because fundamentals by themselves don’t move markets. The decisions that traders make actually move the markets. So we watch the charts to see which direction traders are pushing the markets.

One of the things we really like to focus in on is the price pattern, because often times you’ll see currency pairs start to move higher and then consolidate for a little bit, and the question on everybody’s mind is then "OK, is the currency pair going to continue moving higher, or is it going to reverse and come back down?" 

If you look at the shape of that consolidation range, you can get a lot of information about where traders may be pushing that currency pair next. You can look and see if it’s a continuation pattern or a reversal pattern. That’s one of the things that we really like to look at.

We don’t focus so much on technical indicators. We feel that they have an inherent lag in them that can often be misleading, and we find traders will try and stack technical indicators on top of each other, trying to get more and more information. Really, that just muddies the water.

See related: Technical Indicators: Why Less Is More 

We like to look at a clean chart, look at support and resistance levels and trends and see whether a currency pair is making higher highs and higher lows, or if it’s making lower highs and lower lows. 

I know it sounds pretty simple, but as you start to look at those things, it becomes a lot easier to identify those trends.

So Wade, are there any special considerations when it comes to currencies that might be susceptible to intervention?

Sure, that falls in the fundamental foundation that you’re looking at. You have to know what the central bank and government of any country are like before you dive into a trade. 

Say, for instance, Japan. The Bank of Japan likes to intervene in the currency market on a frequent basis.  Knowing that, you know that if the yen is getting too strong, there’s a strong likelihood that the Bank of Japan may step in and take some action to weaken the yen because Japan is an export-based economy. 

See related: Always Bet Against Intervention

If Japan is not exporting, Japan is not growing, so the Bank of Japan has a real concern about keeping the value of the yen low enough to keep Japanese exports competitive.

If you see the yen getting too strong and you’re tempted to take a bullish trade on a strengthening yen, you always have to remember that the Bank of Japan is out there and may take some sort of action to weaken the yen, which would damage your bullish Japanese yen trade.

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