Strength And Weakness, Together

Forex Trends And Pairs

by James Chen, Cta, Cmt

Combine currency trading with the trend and take advantage of the pairing requirement in the forex markets.

In order to trade forex effectively from a trend-following perspective, a trader should accept two arguments: First, that the concept of trend, or price momentum, exists. Second, that fundamental price strength can be paired with fundamental price weakness. I will explain both premises in detail, along with a method for applying them to trading the forex market.

Trend strength
Trend is essentially price momentum. Trend theory mirrors that of physical inertia, which states that an object in motion tends to stay in motion. Price that has a clear and significant direction continues that way until such time that something happens and the direction changes. The concept of trend provides a sound basis for Dow theory and the discipline of technical analysis as a whole.

Traders who follow the prevailing trend are simply attempting to profit from taking the path of least resistance. Price momentum is assumed to be in the direction of the established trend. Of course, this does not always hold true (for example, when a trend ends), but it is the most reasonable assumption given the relatively limited information of past price action.

Image 1

Figure 1: strength/weakness of euro. Here you see the one-week percentage price change (July 21–28) for the euro against the US dollar (euro up 1.71%), euro against the yen (euro up 2.89%), euro against the British pound (euro down 0.99%), and euro against the Swiss franc (euro up 2.76%).

…Continued in the November issue of Technical Analysis of Stocks & Commodities

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