The Anatomy of a Trend
Perhaps you have heard the saying, “The trend is your friend.” This is one of the oldest sayings on Wall Street, and there is good reason for its popularity. Trading with the trend is one of the most profitable and time-honored methods used to trade any market, but it is particularly effective when trading the forex market. This is because the forex market has a tendency to form strong trends that can last for weeks, months, or even years.
Why are forex trends so much stronger and longer lasting than trends in other markets? Consider the differences between trends in the equity market versus trends in the forex market.
In the equity market, if a stock is performing poorly, there is a certain set of actions that can be taken to remedy the situation. For example, the company can be restructured, or the chief executive officer can be replaced. These actions can cause a rapid change in the fundamental outlook of the company, which will sooner or later be reflected in the price of the stock. This process can happen quickly, sometimes in just a couple of months.
WHY TRENDS FORM
Consider that when we trade in the forex market, we are trading the economies of entire nations. As you may know, when a country’s economy is strong or weak, it often remains that way for years. You can’t simply boost the economy of an entire nation by replacing its leader or by performing a few accounting tricks.
Economic strength and weakness runs in a cycle that is measured ...