A discussion of what to be aware of, when choosing a trend following strategy on forex market, or if you try to locate tops and bottoms. Technical analysis should be applied in conjunction with fundamentals no matter what. Do not try to pick tops and bottoms if you are not ready to let your profits run.

A favorite Forex trading saying is “the trend is your friend”. In other words, if you trade with the trend then you have more chances of selecting winning trades. The idea is logic in that you “go with the crowd”.However, a very popular forex trading strategy involves “picking bottoms and tops”. This trading method normally involves using a forex technical indicator to determine trend reversals. More specifically, traders are searching for positive signs that either a bull buying channel is about to top or that a bear selling channel is about to bottom. The idea of pursuing such a strategy seems obvious in that the sooner you can pinpoint such an event, the more profit you can make following the reversal. However, top and bottom picking does seem like a dangerous practice on the surface because you are about to pit your skills against the entire forex market which is moving in the opposite direction; this is often referred to a “trying to catch a falling knife” in the sense that you are likely to cut yourself. 

Most traders consider that a forex market trend is a predictable price response defined by bull buying or bear selling channels which can exist for some time. A new forex market trend is quite often born when the forex market price breaks through either a support or resistance level and reaches new lows or new highs respectively. 

When you attempt to detect the top or bottom of a trend you are embarking on a complex and quite dangerous exercise, since you are about to trade in the opposite direction of the market. However, many traders still attempt to master this technique because the rewards can be so great. In other words, many traders are prepared to accept the high risks associated with ‘picking tops and bottoms’ because of the tremendous rewards that are potentially available. The mental attraction is that if they can detect a top, for instance, then they can ride the selling channel down and so achieve a considerable profit. 

However, if you are going to accept such trades with a high level of risks then you must perform this strategy correctly. Obviously I am not talking about “risk” in the sense of money management, but more so, that the trend is more likely to continue than to reverse. This implies that you should apply appropriate money management. So when you attempt to locate a top or bottom, you will engage a large risk factor as you are about to trade against the entire market. Hence you must be skilled in detecting a possible reversal, and manage your risk: reward accordingly. 

As a result, fear often arises which can produce significant negative psychological effects that cause you to snatch at quick profits e.g. 50 to 100 pips after entering a trade once a possible top or bottom has been formed. The reason for this action is that knowing that you are swimming against the tide makes you fear that the market will suddenly reverse back towards its original direction. However, this is a bad trading practice, especially over the long haul, because you would be subjecting yourself to intense risk without letting your profits run when there is a good chance to ride the trade for a long time.

So, in order to be successful with this technique, you must commit yourself completely to its inherent concepts. As such, you must be prepared to steel yourself and let your profits run (risk free, if possible) until the channel shows signs of exhaustion. By doing this, your trading strategy will enjoy a good risk: reward ratio over the long haul which it would not do if you continuously snatched at small profits. 

You will soon realize that you can only develop profitable forex trading strategies through your own hard work which will undoubtedly include the study of other people’s forex experiences. 

 In a broad sense, the forex market tracks the stock market, which in turn, responds to global economic movements. When the Dow Jones Index rises, the EURO and GBP tend to rise whilst the USD and the YEN tend to fall. Conversely, when the Dow Jones Index falls, the USD and YEN rise whilst the EURO and GBP fall. As you undoubtedly know, the stock market tends to fall in response to “bad news” whilst it tends to rise on “good news”. Forex trading analysis is used in order to design forex trading systems and consists basically of two elements which are forex fundamental trading analysis and technical analysis. Ideally, both should be used in combination to grasp a better understanding of the forex market, and possible trades. Monitor the trade for possible reversals and exit points using both forex technical and fundamental analysis. 

In summary, forex technical analysis involves examining currency prices over a period of time to try and identify forex trends and their potential reversals by detecting tops and bottoms. For example, if the value of a particular currency has been steadily increasing over a period of several weeks, then it is likely that the trend will continue in the future, at least for the short term. If you can correctly identify a trend, and trade in the same direction you are likely to make profitable trades. Also, the earlier you can identify a trend‘s reversal, the more chance you have of making larger profits.