FOREX FOCUS

Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS& COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.

Spotting Trend Reversals

How can you tell that the end of a trend is approaching?

by Cornelius Luca

WE strive to identify a trend, stay with it, and take as much profit from it as we can. Giving up on a trend, or even a lesser upmove or downmove, is not easy but is often necessary. To help you part with a trend that should be abandoned, here are several methods to identify if the end of the trend is approaching.

TRENDLINES

Figure 1 shows a clear uptrend, a sideways area, a downtrend, and finally a recovery in the euro/dollar. The uptrend was lengthy but the first part was choppy, which likely made it difficult to hold long positions. However, daytraders probably profited from that rough period if they were able to weave their way through the market without holding positions for too long.

FIGURE 1: TRENDLINES. Here's a clear uptrend, sideways area, a downtrend, and finally a recovery in the euro/dollar.
Trendlines can be drawn to bring some order to this market. Figure 2 shows two rising trendlines, which highlight the different acceleration rates in the uptrend. The steep uptrend had only one failure during its climb, but since it was on an intraday basis, it was not technically relevant. It wasn't until the second day after the euro/dollar posted its first top that the market closed below the support of the rising trendline, signaling the end of the uptrend.

Note the other rising trendline, which begins earlier and is much flatter than the trendline mentioned previously. During the first phase of the uptrend, it provided perfect support. Once the trend accelerated, it became useless for some time. But the line became relevant again, as you can see on the far right of the chart, when the euro/dollar declined. The trendline again held well, despite several selloffs.

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Originally published in the March 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.