In a week I’ve come to understand a why my forex trading does worse than all my other trading instruments.
In indicies the trend is your friend, in stocks the trend is your friend, in metals and commodities the trend is your friend but in Forex there is no trend . What there is in Forex is currency is momentum (Momentum exists in all markets) and mean reversion.
Been backtesting price action on soft4x Couple things I noticed. Trends in forex are actually joke in my Personal opinion there is no such thing. Without fundamental analysis trends in forex don’t exist in a structured way as when you are trading like an indices or stocks
-As forex is naturally mean reverting because you are comparing two currencies so one currency say the Euro against the Dollar
-So say something makes the euro weak but the dollar is weak too shorting eur usd will be a bad idea.
This is what causes almost all of the choppy fake out ranges. There needs to be relative strength in one currency and relative weakness in another for a currency pair trade to have the best possible outcome and to react quicker to trades.
-This is even more complicated cos all the pairs are correlated
-If one takes their strategy to stocks or indicies they will see a crazy improvement in the win rate
-With forex you can achieve the same but you need to understand what you’re doing
There’s 2 ways
one is to use a currency strength meter such as finviz.com to pair weakest currency and strongest currency and trade that for the biggest move
Second way is to compare the charts on all the major pairs and decide which currency is showing relative weakness on all pairs and which is showing strength in all the pairs
And figure out the strongest and weakest currency and pair them
Then trade in a direction you will not get whipsawed you’ll get a direction
this is theoretically also what I see in the markets especially in forex as to why people fail that they are trading a currency against a currency .
All trading literature is based on stock or indices in isolation such as Oil or Gold or just and indices like uS30. none of them talk about trading something which is paired to something else.
A better way of understanding this is if you had 2 charts one of Euro in isolation and one of Usd in isolation.
Maybe a bit confusing this is a first draft but basically
FUNDEMENTALS CAUSE ALL TRENDS
FUNDEMENTALS AFFECT CURRENCIES IN ISOLATION
IF A CURRENCY IS WEAK IN ISOLATION BECAUSE OF FUNDEMENTALS WE NEED TO PAIR IT AGAINST A CURRENCY THAT IS STRONG FOR THE BETTER MOVES.
I agree with some of what you say but all is relevant to time-frame as this is the whole context of a chart and from that the whole context of a trade. What time-frame are you talking about in forex trading?
I also agree in general with what you say about trends in forex and the need to consider the relative strength of the two currencies in the pair.
I also agree that trends in commodities and indices tend to be longer than with forex pairs.
But commodities and indices are not quite as isolated as you say here. For example, gold is paired with treasury yields and the dollar value, oil is correlated to the dollar value, US indices are linked with Fed policies and trends in certain economy indicators (such as employment, inflation, retail sales). These links may be more remote and obscure than the two currencies making up a specific forex pair, but they are there and they are causal factors underpinning trends in these instruments.
This i should clarify doesn’t count for intra day trading as you can trade the daily increase in volume based on session times that drive the market in a direction but its generally short lived mean anything above that
yeah its more correlations based on industry i agree but the benefit of them not being directly paired means that theres actual evident directional bias
I think that is more illusionary than actual fact.
The actual name of a commodity/index type instrument is in the singular and not a pair like with forex, which gives the impression that there is only one instrument to consider. But in practice, the other correlated and influential instruments/factors are just as relevant and active. In fact gold is often actually traded as XAUUSD and is considered a quasi-currency in its own right.
Just because the commodities/indices are not named with their related instruments does not mean they are somehow independent of them. Oil, for example will sometimes focus entirely on changes in crude stock levels and ignore the USD level. Other times it follows the movements in the USD…until a sudden geopolitical event/threat or outage somewhere takes precedent.
I do agree that trends in these commodities/indices are usually deeper and longer (and that is why I mainly only trade these). But i believe this is primarily due to the fact that the nature of the most important correlated factors also tend to be more long term in nature. For example, the US stock indices are not independent at all, they are related via a formula to the value of the companies forming the index, and the perceived future value of those companies are also related to underlying health attributes of the US economy as a whole, which doesn’t change from one day to the next.
It also depends how one wants to define a trend! I think even when commodities and indices are ranging, they still tend to move much farther than one often anticipates, and in fact are bigger moves than many identified forex trends.
I seem to recall that it is often claimed that forex trends about 20% of the time and ranges during the other 80%. I don’t know it that is true but I wouldn’t argue against it. It seems about right to me.
I think that the trend always depends on the timeframe your are looking at.
For me the market is always ranging, but if the market in the daily timeframe for example is on the top of the range and fails to break, and goes down to test the bottom of that range it will create a down trend on the lower timeframes.
Most interesting viewpoints and discussion. What we see on our daily TF FX charts are waves, not trends. Institutional brokers and swing traders rely on the 200 SMA as their main identification of a long term trend. On MT4/5 you can zoom out to a position when the trend following the 200SMA is crystal. Usually two/three clicks is sufficient.
I found intraday trading strongest against weakest currency pairs as eventually being a losing game. Also, I found trading both strongest pairs against each other relying only on technical analysis is not advisable, without fundamental input knowledge. Interestingly enough TraderNick on YouTube did exactly that and didn’t realise why his trade failed.
I can’t disagree with what you said. But at the same time, I can’t even overlook how following the trend helped me in improving my win rate and making me the trader that I am today. When I started following the trend, I saw a sudden improvement in my risk to reward ratio after entering the trades on breakouts.
Correct! Forex prices are made to be stable so that the goods you buy are relatively the same week-by-week. So, they should not move too much. Forex is not made to trend like stocks. Forex in general tends to mean-revert more that other assets. Trends in forex are an illusion at the microscale, but in the macroscale, nothing is really happening unless there is a fundamental shift of one country’s currency in isolation that overcomes another country’s currency that can be paired with it. One can look at fundamentals to discover which currency is weak and which currency is strong and pair them up. Also, which currency is free-floating and which are pegged.
