How to Trade Trends

02/12/2013 8:00 am EST

Focus: CURRENCIES

Stuart McPhee

Currency Technical Analyst and Trading Coach, OANDA Corporation

Trading trends is the most simple way to find good trading opportunities explains bestselling author Stuart McPhee.

They say, “The trend is your friend.”  I’m here with Stuart McPhee.  Is the trend your friend? Does trading in the trend represent opportunities?  Is that why you like the currency market?

Absolutely.  It’s certainly not the only way to make money, but I think trending markets and taking the opportunity of those, I think, is one of the easier ways.  I’m not saying making money is easy trading, but it’s probably one of the least difficult ways of finding opportunities.

Well, I’m going to mark down…you said trading was easy.  I don’t care what you just said.  Is it easier, though, when it’s trending, and why?

I think it just… it allows you to ride on the coat tails of a very strong move.  Now, we can rationalize why markets are moving as strongly as they are, why the euro is falling, or why it’s appreciating, but as technical analysts, we don’t concern ourselves too much with that.  We just want to take advantage of that opportunity.  All traders want is opportunity.  We want opportunity to make money, and when markets are flat and don’t go anywhere, and volatility dries up, that’s a horrible time for a trader.

That’s absolutely right.  So, I open up the daily chart.  We’ve talked about this before.  I open up the daily chart, and I’m looking at the euro-US dollar.  What should I be looking at?  What would you recommend I take a look at?

The overall direction.  Where is it hitting?  Just look at the last month, the last two months.  I know we don’t trade off monthly charts or daily charts, but what is the overall direction, and what we’ve seen in the last 18 months, almost two years, is the euro has moved very, very well.  It wasn’t so long ago it was near $1.50.  It fell down below $1.20, it’s risen very strongly above $1.30, so it’s moved very well and provided a lot of opportunity, and right now we say, you know, it’s struggling to hold on to $1.28, recently it was $1.30, $1.29, and now it’s hitting towards $1.27, so it’s often moving.  What’s the overall direction that provides you probability.  It won’t always continue that way, but it’s the most likely outcome.

How do I know when… …what are warning signs that a trend has started to weaken for you?

You know, there are a few candlestick patterns you can use, you start to see some Dojis, you start to see not a lot of daily range between the high and the low, between the open and the close, so we start to see those Doji patterns appear.  We start to see the real depth, the really strong, dominant candles.

I love this hardcore technical discussion, Stuart, so I’m going to hammer this home, because we don’t get enough of it.  You say Doji.  We’re talking about what, exactly?

Doji candlestick is where we potentially have quite a long range, so we get the wicks of the candlesticks, but a very narrow range between the open and the close, therefore, the body of the candlestick is quite small, almost nonexistent, compared to the range.  So, what that represents is indecision, and we often find these candlesticks at the end of trends.  Now, of course, it’s not guaranteed to always work.  Nothing is perfect, but it just provides probability, the most likely outcome from what is potentially a trend reversal.

Do you focus on those Doji or exhaustion patterns on longer-term charts to get a sense that there is an early warning sign of the…

I don’t necessarily focus on them, but I’m certainly wary of them, and I’m always looking out for them.  I like to enter established trends, so if I’m about to do that and I do see one of these patterns unfolding, that’s enough to say “no.”

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