Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 6

Understanding Trends and Tendencies

When you drive your car, do you always use the exact same driving technique? Do you always drive precisely the same way, whether you’re in heavy city traffic or on an empty six-lane highway?

Of course not. You use various driving styles at different times. If you attempted to drive through gridlocked midtown Manhattan traffic as if you were on the New Jersey Turnpike, the results would be disastrous, to say the least! When we vary our driving styles, we recognize that certain techniques are appropriate some of the time, but not all of the time. We use the right technique for the right situation.

Trading is similar in that there is no one technique that will work all the time, under any conditions. Just like the driver in our example, we must vary our trading style so that we’re using the appropriate technique at the appropriate time.

TRADING CONDITIONS

There are three basic types of trading conditions:

1. Trending currency pairs have a definite direction (Figure 6.1).

2. Range-bound currency pairs bounce between support and resistance levels (Figure 6.2).

3. Consolidating currency pairs are trapped in a narrow, tightening area (Figure 6.3).

FIGURE 6.1 EUR/USD currency pair in a downtrend on the daily chart.

Source: FXtrek IntelliChart^TM. Copyright © 2001-2006 FXtrek.com, Inc.

FIGURE 6.2 AUD/CAD is trapped in a range on an intraday chart. ...