Dear Traders,

You have probably heard many times before that the trend is your friend. Financial trends are created by powerful institutions and different economic factors. That's why I always say traders should follow the banks. Think of the bank as a shark and yourself as a small fish - not big enough for the shark to want to eat. The smaller fish always follows the shark and eats the remnants of the shark's food. In trading terms that is exactly what you should do - follow the big companies that actually shape trends, so you can avoid being caught on the wrong side of the market.

The trends we love

Usually, the most difficult aspect of trend trading is trying to figure out when a trend is about to begin with. Typically, trends in a new direction will start with a reversal pattern and MACD divergence. 

When a new trend takes shape, the market is likely to begin making thrusts and pullbacks in the trend direction. This is when we use our systems and methods to actually pinpoint a good entry - follow the sharks. If you are patient enough, you will hold on to a trade during a trend and make the most of it. The best trend moves happen when the fundamental picture agrees completely with the technical picture as in this example. By simply aligning fundamental reasoning with technical knowledge, we get no brainer trades i.e. money for jam.

The trends we hate

The Forex market is much more active and fast paced than the conventional stock market and traders definitely need to be cautious. In this highly dynamic market, the market's prevailing supply and demand forces will always affect the currency rates.

But the law of supply and demand also states that prices needs to be in equilibrium. In our everyday life, we observe the equilibrium as a natural process. For example, If a company sells something too expensive, nobody could afford it. On the other hand, if a company sees that it can sell at a higher price because more people want its product - it will. The same is true in the Forex market.

Highly dynamic movement means established trends can often lead the exchange rates to soar too high or low. Consequently, the demand and supply curves will stray far from equilibrium - which is when it gets tricky.

As a result, the central bank is compelled to intervene in the floating market to control the foreign currency exchange rates. This form of intervention is primarily driven by pressure from external sources. The latter aim to stabilize currency rate fluctuations, as investors will hold back their investments if the currency rate is way out of equilibrium. As the central bank plays the vital role in stabilizing the economy of a country, it is forced to step in to curb the fluctuating prices - otherwise known as dirtying the float.

Once there is intervention, we will see a strong one-way directional movement in the exchange rate. This means either the end of a trend we know of, or a huge retracement in the opposite direction. Either way, this is the time when we need to be ready for a possible trend change and analysis re-assessment.

A new trading approach