Do Trendlines work in Forex Trading

“The trend is your friend”

Have you heard that saying before?

If you’ve been trading for more than 15 mins you should have.

My favourite part is the often forgotten second verse:  

“The trend is your friend until the bend at the end!”

For those of you that know me, you’ll know I’m a huge fan of trading in the direction of market strength. And one of the easiest ways to identify market strength is to use trendlines.

So, to answer your question. Yes! Trendlines work in forex trading.

They’re remarkably accurate and one of the most useful ways I’ve found to identify entry and exit levels.

I find them most accurate on the 1hour and daily charts, however you can use them on pretty much any timeframe down to the 5-minute chart.

Why do trendlines work?

Trendlines are easily identified and programmable (for those using an EA or algorithm), as a result, the majority of trades use them and they become self-fulfilling.

I’ve highlighted a recent bearish trendline on the AUDUSD here for you guys to see how predictable it can be. Each time price approaches the red line it pushes further down.

Now imagine thousands of traders around the globe making this same observation. What are they doing every time price approaches the line?

Selling (of course).     

Which then pushes price down again, making a new lower low.

As you can see from this example, these trends don’t always a precise level. Often, you’ll see price bounce before it hits the trend line, or push through slightly before falling back into the long term trend. As a result, trend lines should only be one weapon in your arsenal, don’t rely on them solely.

A few other questions I’m often asked about trend lines:

• Can trend lines curve?

I’ve observed other educators (not on our site!) drawing free hand on their charts like this:

Unless it’s for creative expression, don’t do this. These levels mean nothing.  

• Can a bullish market also have a bearish trendline?

You’re essentially asking if you can buy when the market is dropping, a bit like this:

If you were to sell around this red line, you’d be trading against the direction of the overall trend.

Bad idea!

This is also what’s known as counter-trend trading, and not something I advise traders to do.

• How do you know when a trend has changed?

Great question! As I said, the trend is your friend until the bend at the end. Predicting when the bend will happen is incredibly difficult, so when it does happen you need to be ready to cut your trade. If you picked up the trend early enough, you’ll have done very well up until that point and should still exit the overall position profitably.

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The Biggest Psychological Challenges for Forex Trading

Dear Trader,

So you you’re looking to master trading psychology and want stay in control of your emotions?

Well done.

You just passed a vital step in your trading journey without even knowing it.

Emotions are what makes or breaks traders.

Even a mediocre strategy can be profitable if applied diligently. What causes a bad trade to morph into a catastrophe is your reaction to it.

By understanding your psychology and the fear/greed that we feel when making and losing money in the markets, you can begin to put strategies in place to control them. You’ll then avoid the cry of rookie traders around the world “It has to turn around soon.. let me hold for a little longer”.

Margin Call.

Here are some techniques you can use to help you win the battle between your heart and mind.

Lesson 1: Never fall in love with a trade.

It’s easy to become attached to trades, particularly if we’ve been holding a position for a long time. A certain sense of familiarity comes into play as the market moves up and down, your affection for the trade rising and falling with each candle.

But the market will never love you back.

The forex market is more like a psychotic nyphomaniac with access to your ATM card than the woman of your dreams. If you marry a trade, it’ll be sure to take your house, kids and dog. Leaving you with nothing but a box of memories and a broken heart.

Treat each trade like you’re negotiating on the internet. Be an impolite dickhead. If the market doesn’t give you want you want, close the trade and say “don’t let the door hit you on your way out”. Then wait for the next one.   

Lesson 2: Keep a journal

Why did you open your most recent trade?

Was it because the conditions of your strategy aligned perfectly allowing you to pull the trigger?

Or were the conditions close… but you got bored and opened the trade anyway?

Or was it because you were in a good mood due to your home team winning a sporting event and you wanted to celebrate by trading?

Write it all down! At the conclusion of the month reflect on your performance and how closely you adhered to your trading plan.

If you traded like a cold faced killer, celebrate with a beer or three regardless of your monetary success. Not every month will be a winner. The only thing you can control is how you react when the market moves, and if you had a plan and executed it precisely you’re way ahead of 99% of traders.

Lesson 3: Don’t be a Nigel-No-Friends

Trading is lonely. Long gone are the days when I would spend the morning shouting orders in the futures pit, then smash a steak over a few pints with my colleagues, to return in the afternoon for more mayhem.

Now my trading takes place in my office, in front of half a dozen screens, normally by myself.

When you’re sitting at your PC preparing your trading day it’s important to find other like minded souls to bounce ideas off and hold you accountable.

It’s one of the reasons I joined the team here at ForexSignals.com. Our trading room gives me a great outlet to discuss the markets and interact regularly with so many of you. Our community is what helps me stay level and thinking clearly.

Our trading room has saved hundreds of members from throwing their money away trading emotionally. I certainly encourage you to check it out.

Lesson 4: Beware! Leverage can be Lethal

Forex trading is wonderfully appealing due to the extremely high leverage we’re able to take advantage of. Many brokers offer up to 500:1, meaning for every $1,000 of real money, you can trade the equivalent of $500,000. Mental!

But the flip side is your account can go from $1,000 to zero in the blink of an eye. Even small movements in the currency markets will have a substantial impact on your balance. You can’t expect to remain unemotional when your account is bouncing around $100 at a time.

My friend and colleague Joel Kruger uses an innovative technique with his students in an effort to quell the excessive leverage of so many trader. He instructs them to trade a 3:1 leverage practice account and only once they have mastered trading under these conditions does he suggest clients begin elevating it.

It’s hard to get excited when you’re trading at 3:1 leverage, and this is precisely the point. Joel recognises that his students have suffered because of their attraction and excitement of making money quick. These synthetic handcuffs students trade with mean they focus on executing their strategy with a sound mind, rather than making money (which should always be a byproduct).

It sounds corny, but I truly believe you are the master of your own destiny. The choices you make will dictate your success. So next time you make a trading decision go through these checks:

• Does this trade love me as much as I love it? (No!)
• Why am I opening the trade?
• Who can I discuss this trade with?
• How much leverage/risk am I taking with this trade?

Stick to these lessons and I guarantee you’ll be a more successful trader.

If you’d like to discuss this article in more detail please feel free to comment below, or drop into our trading room during one of my live streams.

I hope to see you in there!

Does anyone make money Trading Forex??

You’re starting to wonder whether you’ve wasted your time trading forex aren’t you?

“Maybe this whole thing is just a scam…?”

I assure you it’s not, you just haven’t mastered it yet.

I’ve been making money trading for decades, as have my colleagues Mark Bennell and Joel Kruger. But it ain’t easy.

Each one of us thought about quitting in the early days. There were times when I found it difficult to keep my head up, or face my friends and family after a string of losses. Doubt crept in and I would dream about getting a regular 9-5 job so I’d know when my next paycheck was coming in.

Boy am I glad I didn’t listen to that little voice in my head telling me to work in a grey cubicle and wallow away my life in the corporate world. I’d probably have necked myself by now if I had…

There’s only one way to live in my book, and that’s living and dying by my own ability and hard work, not determined by some line manager in charge of my next promotion.

As traders we are in a wonderful position to change our lives, support our family’s and create financial freedom. The sort of freedom suit wearing wannabes can only dream of.

You can make money trading forex, but it’s like any skill or profession. It takes time and diligence to succeed.

The trap many traders fall into is thinking this is a get-rich-quick scheme, and if they just follow a simple moving average strategy they’ll make a bucket load of money and be able to sit on a beach for the rest of their life.

If you really sit back and think about that for a moment, it’s ludicrous. One of my favourite saying is “If it was easy, everyone would be doing it.” and forex trading proves this point.

New traders generally give up after a few months, or maybe a year due to repeated failures. If you started a new business and didn’t make money during the first year, would you consider it a failure?

Probably not. Most business take a few years to generate a profit, and trading is no different.

It’s hard to rise above the 95% of losing traders, you have to claw your way into the 5% group through focus, sweat and determination. 

Those that lose money over the long term are quitters, likely moving onto the next hot money making scheme (read: crypto trading, affiliate marketing, facebook advertising, amazon dropshipping).

It’s the same cycle each time. They eventually get bored, followed by failure, only to go going back to their regular boring job to sell their time (be sure to read our blog post on why you need to stop selling your time).

So to answer your question – Yes! You can make money trading the forex market, I do well, and have several colleagues that also pay their way handsomely through life with their trading profits.

Come and join me inside the trading room so we can discuss just what it takes to become a professional trader and make a living from day trading.

I stream live each day after Joel Kruger, midway through the London trading session.

I look forward to seeing you there.

How many monitors do you need to Trade FOREX??

How sexy is a desk with multiple monitors? Nothing excites many of us more than sitting down to our desk with charts whirring and price jumping, reaching for that elusive TP. We’re like captains on a space mission, destination – planet money.

A wise man once said, “Unless you have at least 6 monitors, you’re a loser”.

That wise man was broke 3 months later.

Surely the more markets you can watch at once, the more likely you are to detect trading opportunities, and more money you stand to make!

Right?

Not really…

You only have 2 eyes and unless you’re a circus freak, you can only look at one thing at a time. If you’re looking at multiple monitors it generally means you’re splitting your focus and not absorbing all the information needed to make logical decisions.

Research has shown there’s no such thing as multitasking. Instead, your brain toggles rapidly between each task giving it undivided attention, but only for a moment before toggling back to the previous task.

How many times have you been looking into a pair, only to see a little movement in your peripheral?

Is that a trade setting up? No… where was I? Ok, focus.

More monitors are guaranteed to do one thing – make you feel more successful than you are.

One monitor is plenty. By glueing your eyes to a single chart it makes it easier block out distractions. If a trade looks to be setting up, check other timeframes and correlated pairs, run through your trading plan and decide on a course of action. It should only take 30 seconds to to confirm, and any trade that takes less than 30 seconds to analyse isn’t a trade at all. It’s a punt.

And punting’s for gamblers, not traders.

“Sure Andrew, but if that’s the case, why do you have so many monitors? Hypocrite!”

Whoa, relax.

I have 4 monitors and a news service running on my desk, but it’s taken me time to understand my limitations and deliberately narrow my focus. I have the ability to block out peripherals until a decision is made, only then will I allow distractions to come into view.

I also use my additional monitors to join in the conversation within our trading room, or read up on the latest analysis from my advisory services.

Interestingly when I travel I happily (and successfully) trade from my laptop without issue. It’s nice to take a break from the barrage of information on my full trading station once in a while and view the market through a different lens. 

If you’re already trading with multiple monitors I encourage you to pay attention to your focus. How often are your eyes darting between each chart and screen? Take your time, understand what you’re looking at before moving on.

In my experience multiple screens normally make traders less efficient and more prone to over-trading.

What do you trade on? Please feel free to share pictures inside our forum.There’s some impressive PC’s out there I must say!

The Power Measure: How Is Volume Moving Price?

In the most recent Forbes article, I highlighted the importance of monitoring the amount of movement we get per unit of market volume.  When we look at normal bar charts, we see price as a function of time, with volume on the X-axis.  A large bar tends to be one in which we see increased volume (increased participation at that point in time), moving the market more than usual.

A different way of viewing market behavior is to look at volume bars (price where each bar represents an amount of volume traded) and see if bar size (volatility) is expanding on the upside or downside.  What this is telling us is not just how much volume is coming into the market, but how much each unit of volume is actually moving price.  When we see bigger bars coming in on market upmoves than downmoves, we can actually visualize where the market is finding its greatest ease of movement.

(This is a great example of the importance of creativity in trading.  Looking at price-volume-time through different lenses enables us to see fresh relationships that can illuminate what is actually going on in the market.  Looking at the same charts as everyone else is a great way of seeing the same things as everyone and becoming part of the proverbial herd.)

Above we see the full day's trade in the ES futures for 10/16/2018.  It's a great day to study, given the major turnaround in the overnight session and trend day during NY hours.  The blue line is the ES futures, with each bar representing a small unit of trading volume.  The red line is a running correlation of the size of the bars and the directional movement (open to close) of the bars.  Hence, when we get more upside movement per unit of trading volume, the correlation goes positive and vice versa.  

Shifts in this "power measure" tell us that volume is moving price more easily in one direction than another--a worthwhile heads up, though not a precise timing measure.  Notice, for example, how the correlation shifted positive and stayed positive during the period of the market's big turnaround.  Notice how subsequent moves lower in the correlation occurred at successively higher price lows--a great indication of the underlying strength of the market.

This is a relationship relevant to multiple time frames.  The illustration above, with over 500 bars per day, is clearly relevant to active day traders.  I maintain the measure for bars with much larger volume to examine multiday patterns.  The value of such measures is not as crystal balls, but as multiple lenses through which we can understand the dynamics between buyers and sellers.  There are many other such lenses, such as the shifts in distribution of upticks and downticks across all listed stocks.  Many trading problems occur, not because of emotional disruption, but because of cognitive poverty:  an absence of perspectives that yield fresh, valid insights.

Lessons We Can Take Away From Broadly Oversold Markets

And the trick, of course, is getting cut the right way.  An uncut diamond isn't worth much, and a diamond cut the wrong way is too flawed to be worth anything.  When we take losses the right way and learn from those, that's when we develop the facets that give us value as traders.

One of the bad cuts I see people taking in the recent equity markets is failing to adapt to new, volatile market conditions.  Buy the dip at VIX of 12 is quite different from the same strategy at VIX of 24.  When a market becomes more volatile, we trade more volume per unit of time.  Moves that might have unfolded in hours now occur in a few minutes.  That has relevance for how you size positions and how much heat you can take on ideas that ultimately work out.

I looked at the overbought/oversold statistics fromIndex Indicators and found something outstanding.  Fewer than 5% of stocks in the SPX are trading above their 3, 5, 10, and 20-day moving averages.  In other words, not only are we quite oversold; we are very broadly oversold.  Essentially everything has gone down.

So what has happened historically after such broadly oversold occasions?

Since 2006, when I began my database, we have only had 15 other such days.  That means that broadly oversold markets only occur less than half a percent of the time.  As we saw in the last post, this means that the current market conditions are historically rare.  Below we can see the dates of occurrence in chronological order:

9/29/2008

10/7/2008

10/9/2008

11/20/2008

5/6/2010

5/7/2010

5/20/2010

8/2/2011

8/4/2011

8/8/2011

10/3/2011

11/23/2011

8/24/2015

8/25/2015

2/8/2018

We can see right away two things:

1)  These rare occasions can "clump".  When we see one, it's not unusual for others to follow.  This is also something we saw in the last post.  A very oversold market can stay oversold for a period and indeed become more weak.

2)  These occasions have occurred during markets we have recognized as meaningful corrective periods or as bear markets.  These occasions have also been accompanied by significant volatility.  The median VIX for the 15 occurrences has been almost 41.  The median VIX for the rest of the sample is a little over 16.

And what have been the forward paths for these broadly oversold markets?

*  Bounces have been the norm, but it's not always a one-way path.  The next day has been 9 up, 6 down.  Two days later has been 12 up, 3 down.  Five days later has been 12 up, 3 down.  That being said, ten trading days later we see 8 up, 7 down.  Ten of the 15 occasions have posted a lower daily close within a ten trading day period.  Two-sided markets over the next two weeks are not unusual.

*  Forward volatility is expectable.  Thirteen of the 15 occasions moved more than 2% from close to close over the next two trading sessions.  Nine of the occasions moved more than 4% up or down over a next five-day period.  Very large moves are not uncommon.  During 2008, we saw near-term closes up 9% or more and down 9% or more.  After the 2011 occurrences, we saw moves up and down exceeding 5%.

*  There has been opportunity longer-term.  The longer-term investor recognizes that broadly oversold markets are taking down high quality, growth companies along with less stellar firms.  This can create unusual value for individual stocks and also for the market. With the exception of the 2008 occurrences--a protracted bear market--we were meaningfully higher in SPX one year after the broad selling periods.  If we believe this to not be a recessionary period with major economic dislocations, the drop can be a great opportunity to buy stocks for longer-term holding periods.  

So it's back to the theme of getting cut the right ways.  When market participants puke, it's common to see favorable forward returns, but not without volatility and retracements.  Shorter-term traders can take each day as it comes, knowing there will be meaningful movement to capture.  Longer-term investors can identify stocks worth snapping up at bargains, but also create market hedges (and size appropriately) to weather the forward volatility.

Knowing historical patterns is a great way to prepare oneself for forward price paths.

Further Reading: