Here
at OmiCronFX we are constantly monitoring Forex currency pairs in order to identify
those that are trending or are about to do so. Even when we engage with
instruments that are range-bound, which is the opposite to trending, it is in
the expectation that they will break out at an early stage and begin to move up
or down in a pattern that we can exploit.
A decent
trend will be characterised by a recognisable trending channel, such as can be
seen in the weekly chart above, which is of the GBPUSD pair.
Notice
also how an exponential moving average, in this case the 25 period EMA, tracks and
almost defines one side of the trending channel.
At
present, good examples of trending currency pairs are those that contain the
British Pound, such as GBPUSD (trending up) or EURGBP (trending down). We have
experienced some good winning trades on both of these in the recent past.
…but trends often retrace
The
same pair is shown above on the four hour chart. There are a number of rules
attached to trading trends. Firstly, we only take trades that are in the
direction of the dominant trend. We use the word “dominant” to acknowledge
that, within trends that are obvious on the larger time scales, there can be
others that are only to be seen in smaller scale situations. This conforms to
the principles of fractal geometry, which formed the core of the work done by
Benoit Mandelbrot, whose name we have used to give the title to our Mandelbrot algorithmic
routine.
Secondly,
we recognize that trends retrace from time to time. On those occasions we would
prefer to sit on the sidelines. The same retraces, when the play out, give us
the higher highs and higher lows that define the existence of the rising trend
and the lower highs and lower lows that make the falling trend.
This
morning, as can be seen in the four hour chart above, price has risen to within
a whisker of the top of the trend channel on GBPUSD. There is a good chance
here that a retrace is about to begin. We would not attempt to put on any new
trade under these conditions.
Lastly,
we must always be on the lookout for the time that the trend changes, because change
they most certainly do. They can either go into reverse, or disappear altogether,
when a range-bound channel will instead become evident.
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