Cashing In On Short-Term Currency Trends
Trends may be rarer than trading ranges, but that doesn’t mean they can’t be traded. This strategy uses two time frames to identify the trend, an overbought-oversold indicator to pinpoint entry and a trailing stop to protect gains on profitable trades.
BY TIMOTHY O’SULLIVAN
Many technical trading strategies revolve around the assumption that markets will hover withi given range — and within a good reason. Seventy percent of the time markets will bounce back and forth between support and resistance levels, or fluctuate randomly. The rest of the time, market behavior is characterized by persistent price moves — trends — that shatter support andresistance levels.
Although these basic probabilities work against traders who try to exploit trends, the potential rewards can be worth the risk. It is possible to increase your ability to capitalize on t rends by locating trend signals, identifying specific entry points within the trend and using risk management techniques to limit losses.
The following sections will explain how a trading system based on these concepts works especially well in the foreign exchange (Forex), or curre n c y, market, particularly with the “major” currencies — the U.S. dollar, Euro, Japanese yen, British pound, Swiss franc, Canadian dollar and Australian dollar. More than 85 percent of transactions in the $1 trillion per day Forex market involve the majors.
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