Forex Market Trends – The Holy Grail Of Trading?

If you talk to a day trader about Forex market trends, he will shrug and tell you there is no such thing. Swing traders and long term traders know better. They will explain to you that there is a fortune to be made in “trading with the trend”. What is the truth? Or are both groups wrong, or perhaps both are right?

If you are a day trader, you are of course not concerned with whether there is something like a ten year up and down trend in a particular currency market. For you the long term is between breakfast and lunch – late afternoon is a distant horizon that doesn’t concern you at all. Many day traders do large numbers of trades during a single day, making or losing small amounts of money all the time.

Swing traders follow so-called “swings” in the market. Medium term movements that seem to form some sort of pattern…. Moving up for a few weeks, sometimes stabilizing at a certain level for a while, and then moving down again. It sounds easy enough to follow the trend in this type of market. The problem is, any unexpected economic news might cause the swing to turn around and move in the opposite direction very quickly.

The third category of trader is the long term trader. They are not really traders at all, but should actually be called investors. They would only buy a currency if underlying economic factors (fundamental factors) indicate that the currency is on a long term upward trend. If the reverse is true, they would sell it (or go short in trading lingo). They do use technical indicators from time to time, but then over a much longer time frame than either day traders or swing traders.

Swing traders often use both technical analysis and what is called ‘fundamental analysis’ to make buying or selling decisions. Fundamental analysis looks at all the underlying economic factors that influence the movement of a currency. One example is inflation. When inflation of one country is higher than that of another, the currency of the first country will depreciate to adjust for this – all other things being equal!

Another type of analysis, used more by swing traders and long term traders is called fundamental analysis. In fundamental analysis one would try to identify ‘fundamental’ economic factors that will have an effect on the future price movements of a particular currency. One such example is the effect interest rates have on the value of a currency. If the interest rate goes up, it will have an effect on the value of that country’s currency which could not be predicted by looking at technical indicators alone.

Chart used by traders vary from the simple line chart, to candlesticks and bar charts. A line chart is basically just a line connecting today’s closing price with that of the previous day and so forth. Bar charts show both the opening price and the closing price. The hugely popular candlestick charts display a lot more information: highest prices, lowest prices, as well as opening and closing prices.

Forex market trends is a subject that often causes heated debate among traders. There are as many experts as there are traders. Some swear by “the trend is your friend”. Others do quite well with buying a solid currency like the Euro when its price is dropping, because they know it will sooner or later rise again.

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