Tuesday, July 8, 2014

Forex: We like to trend | …but trends often retrace or disappear

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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