You may have heard the saying “The trend is your friend until it bends.” Technical analysis helps us identify the trend so we can jump on it and trade it until it changes. Since the forex market has very strong trends, technical analysis is a very effective technique.
Some traders still insist on trading against the trend, arguing against it, even when price movements are clearly in trend. Buying when the currency is in a primary downtrend or selling when it is in an uptrend, rather than buying.
Our main goal is to identify the primary trend, intermediate trend, and short-term trends and trade in that direction. Then we hold the position until our calculations suggest otherwise.
Here is a quote from Jesse Livermore, a tenacious, flamboyant, and profitable Forex trader,
“We know that prices move up and down. They always have and always will. My theory is that there is an irresistible force behind these major movements. That’s all you need to know. It’s no good being too curious about all the reasons behind price movements.
You risk the danger of fogging your mind with irrelevant things. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Don’t argue with the condition, and above all, don’t try to fight it.”
There is gold in these words. If the market action shows that your analysis is correct, successful traders stay with the market and maximize profit according to their capital management principles.
If the market reverses, the smart trader will get out and reap the profits.
Watch the market and listen to what it tells you about upcoming trends, and most importantly, don’t ask for reasons for what it does, focus on what is most important.
There are often recurring patterns in price changes. Once established. They become the most likely way to predict price changes.
They can be categorized into two types of markets, trending and trendless. Trending markets have upward and downward trends; they are usually less than 45° and are stable with occasional breaks or periods of profit-taking.
Markets without a trend are characterized by very sharp movements above 45°, which most often cannot be sustained. Although price movements can move a significant number of pips in a short time, they often do not yield a large net profit.
Choppy markets often cause stop-outs, and a sideways market with minimal price movements makes it very difficult to predict which way the price will move.
For these reasons, our goal is to enter the market with the trend and meet our trading objectives.
The basic message is: “Be a good friend of the trend,” a simple concept, but powerful.