Trading with the trend in the currency markets

‘The trend is your friend’ is an old saw in the trading world – and nowhere can this be illustrated better than in recent action between the euro and the US dollar.

There is no doubt that trading with the trend can cover a multitude of timing sins.

Even if you get your timing off, if your trade is in the direction of the main trend, you should come out alright – provided the trend continues! 

Why you should never trade ‘on the news’

Despite the plethora of negative news that has been thrown at the euro, it remains in a bull market.

In fact, this is a clear example of why trading ‘on the news’ is rarely profitable – if you believed the euro doomsters, you would be on the losing side.

Here is the daily chart going back to last year:

EUR/USD spread betting chart  

(Click on the chart for a larger version)

Look at all the touch points on my lower tramline.

These were the many excellent places to go long at low risk since January (especially since 11 March, when I had enough touch points to draw my tramlines with confidence).

My upper tramline is not quite so convincing, but is a good working model.

Let’s now draw a centre tramline mid-way between – and this is what we find:

EUR/USD spread betting chart  

(Click on the chart for a larger version)

This new line passes right through the minor tops on 7 and 21 March. That is satisfying.

So short-term, I have an upside target where price meets this centre line.

But will it make it?  There is evidence that it may not – and here are the flies in the ointment to the bullish case.

Can the bull market continue?

The Fibonacci levels shown are the retrace levels of the big bear market from the 9 November high at 1.5150 to the 10 January low at 1.1870.

The market has just made it to the 76.4% retrace level.

This is normally a place of heavy resistance.

There can be ‘overshoots’, but eventually, the markets do come back to test this level – in some cases, several times.

The big rally from the January low is a clear A-B-C wave pattern (so far).

An A-B-C pattern is corrective and counter-main trend (down).

Also, the momentum reading at current trading has not matched the high momentum reading made at wave A on 2 February.

This is a negative momentum divergence and could be significant.

In my experience, this is not enough to predict a change in trend, as I have often found that a momentum divergence can continue for a very long time – longer than I could believe possible!

Bearishness towards USD is at record levels – no-one has a kind word for it.

But be warned – big market turns arrive under these conditions.

But at this stage, the current trend is clearly up and until I see clear evidence that the trend is changing, I must conclude that the upward trend will continue.

The last time it was hit from underneath (7 and 21 March), the market backed off sharply right back to my lower tramline.

Will it do it again?

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