Investing Basics
Resources for Advanced Trading

Finding & Staying With Market Trends

The chart above is that of an international currency. The reason I choose this chart is because the currency markets have a characteristic of extended trending at times. For short-term traders, these trends can be very profitable (if these traders are not caught on the wrong side of the trend). For position traders, monitoring the markets overall trend is the key to a successful trade and profits.

As a short-term investor, there are many opportunities to make a quick profit on this chart. There are also signals that may cause some losses some big and some small. In my opinion, the trading signals found within a market such as this can be misleading to some investors. The Western technical indicators, such as Stochastics, Williams Percent Retracement, and others, will quickly reach their extreme levels and can cause investors to trade the opposite side of the market trend. This reaction within these indicators can cause unwanted losses to occur and cause investors to loose confidence in the market.

Many means have been devised to attempt to track and stay with the markets overall trend. One of the most common is the use of a long term moving average, often ranging from 50 session averages to 200 session averages. One of the biggest problems with this technique is that the market price crosses above and below these averages rather late. Also, during market congestion unwanted extreme losses can result.

The Pattern Forecaster Plus software application uses a couple of techniques to attempt to track and follow the markets overall trend the Trending Candle / Body Reversal technique, the Adjusted Stop Level Breakout System and the Relative Momentum Index. Investors should also choose to use an age old technique that has proven itself over the years as well called the Weekly chart. The Daily chart above illustrates the effectiveness of the Trending Candle / Body Reversal investment technique on a trending market.

The Weekly chart is one of the most important investment analysis methods for tracking and trading the markets overall trend. Many traders recently have begun concentrating on the extreme short term side of the markets (in most cases intra-day charts). By doing so, many of them have neglected the information contained within the Daily and Weekly charts because they are concentrating on only one market perspective. It is imperative that all investors use and track multiple perspectives of any market. Without using the information contained within the different perspectives of the market price activity, investors are likely to misinterpret the markets trends and the potential for the market to continue trending.

The chart above is a Weekly chart of the same market on the top of this page. Notice that the Weekly chart more clearly displays the markets overall trend and eliminates the potential false reversal signals seen in the Daily chart as the market Breathes. Notice how clearly trends A, B and C are defined on the Weekly chart. I know that many of you are thinking but the Daily chart gave quickly entry and exit signals. This is true and Im attempting to instruct investors to use the Daily chart for the short-term entry and exit signals. Im also attempting to show investors how the Weekly chart can be very instrumental in the success of many investors by providing a crisp, clear picture of the markets overall trend.

One other thing I should mention is how the congestion area on the Daily chart (between trend B and C) has been reduced to a series of small candles and Dojis on the Weekly chart. This further illustrates why the weekly chart can be an important tool for investors.