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

CHAPTER 5

Trend Is Your Friend?

Everybody loves a trend. Almost every trading book repeats the dictum “the trend is your friend” ad nauseum. Furthermore, most traders are much more comfortable trading with the trend, rather than against it. In FX, where strong trends tend to develop often as major economic themes seize the market for sometimes months at a time, trend trading is the preferred strategy of choice.

What is a trend? The basic, most common definition is higher lows for an uptrend or lower highs for a downtrend, both of which form stutter-step patterns in the price action. Note that trend is defined by the price action of the lows in a uptrend and highs in a downtrend, something that may appear at first to be counterintuitive but actually makes sense upon further reflection. Although most traders would define an uptrend as a series of higher highs, in fact prices can sometimes pause instead of rising. What makes an uptrend an uptrend is the failure of prices to go down; bulls overpower the bears and step up to buy every decline, which they perceive as an opportunity to acquire tradable assets at discount prices. The ever-higher slope of higher lows is what forms the uptrend on the charts. The process and the price dynamics work the exact same way except in reverse in downtrends.

Of course, this is an idealized definition of trend because prices rarely create such perfect patterns. Even in the strongest uptrends and the most vicious downtrends, prices will temporarily ...