Technical Analysis of the Currency Market: Classic Techniques for Profiting from Market Swings and Trader Sentiment

CHAPTER 3

The Secret to Trading

Here is the secret to all trading.

Ready?

Prices will either trend or range. That's all there is to it. It really is that simple but clearly not that easy. These two discrete properties of price require diametrically opposite mind-sets and money management techniques. Knowing when to apply each is what makes trading so difficult. Fortunately, the FX market is uniquely suited to accommodate both styles, providing either trend or range traders with opportunities for profit. Since trend seems to be the more popular subject, let's examine it first.

What is trend? The simplest definition of trend is higher lows in an uptrend and lower highs in a downtrend. Some traders define trend as prices remaining within an upward or downward sloping 20-period moving average. Yet others may draw trend lines or channels. I have my own definition, involving Bollinger bands, which I will discuss later in the book, but regardless of how one defines trend, the goal of trend trading is the same—join the move early and hold the position until the trend exhausts itself. The basic mind-set of the trend trader is “I am right or I am out,” and his governing philosophy boils down to this: Do today what happened yesterday. The implied bet all trend traders make is that price will continue to follow its current direction. If it doesn't, there is little reason to hold on to the trade. Therefore, trend traders typically place very tight stops and often make several forays into the ...