Forex Trading with your Buddy

Wednesday, April 29, 2009

I do not believe that anyone who has been trading the currency markets for more than a few months will have failed to notice the phenomenal increase in market volatility.

With increased volatility, so we see that trends tend to be of much shorter duration if a trend can be found at all.

If you examine the GBP/USD for example, prior to the credit crisis it had been in an overall up trend from March 2nd 2002 - until October 2007. Well over 5 years.

If you had bought on the 2nd of March 2002, 1 single standard lot (not allowing for the roll over charges) you could have cashed that in on Friday evening October 5th 2007 with a profit of over SIXTY FIVE THOUSAND DOLLARS.

That is a profit of a little under $1000 (per 1 single lot traded) each month for the duration of the trend.

Anyone that actually did this would have absolutely no problem with agreeing the common and often touted phrase - The Trend is your Friend.

Since November 2007 and today, the same pair has been in what can only be described as a complete reversal.

In the past 16 months, the Gbp/Usd has dropped by over 7,500 pips or, to put that in to perspective, for one single standard lot (not allowing for the roll over charges) you could have cashed that trade in for over SEVENTY FIVE THOUSAND DOLLARS.

That is a profit of a little over $4600 (per 1 single lot traded) each month for the duration of the trend.

Now I am not sure about you but for those levels of profit I am willing to at least consider the trend as a possible friend.

Of course, many of us do not trade over such long periods of time but this does not mean that we cannot follow a trend of sorts.

Within each main trend there are smaller trends. These are intermediate trends and are best calculated from a 1 day and 4 hour chart.

Particularly when the markets are volatile, seeking out the intermediate trend is a very useful strategy as the longer term trend can be difficult to properly calculate.

There are many ways to calculate the intermediate trend, but failing all else, the time honoured and trusted method is simply to draw a trend line using at least 3 swing points on the four hour chart.

Perhaps the time is right to introduce a new trading maxim:

The trend may well be your friend, but when your friend is not available the intermediate trend is your best buddy.