FX Trading Guide:

4 Simple Ways to Spot a Trend

JON MCFARLANE AND VERNON LEES

BetOnMarkets 2011

Foreword
We wrote this guide to give people wanting to trade Financial Fixed Odds some simple tools and disciplines to produce consistent profits in their trading. While no guide can guarantee profits, if you follow the simple steps weve outlined, youll have a firmer base on which to build your fixed odds trading skills. We hope you enjoy the guide and find it easy to follow. And we hope you can use the ideas in it to make consistent fixed odds trading profits.

Jon McFarlane & Vernon Lees

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Trading the Trend Strategy

This strategy for fixed odds trading is designed for once a day, set & forget trading. You need only check your charts and the strategies once a day. If an opportunity is present and you have a valid set-up, you can place your trade with BetOnMarkets and walk away. Over time, you will become familiar with the basic signals described in this strategy across your markets of choice. You can use it as is or alternatively you may want to enhance it based upon your own personal trading approach and experience. Trend trading is a common Forex trading strategy and is particularly suited to fixed odds. When you identify a trend, there are many ways in which you can profit from it due to the range of available bets. Trends tend to persist over long time periods so the key to maximizing profits is to identify them early and exploit them to their fullest. A single trend can yield multiple trading opportunities. While it is beneficial to identify trends early to give yourself the maximum opportunity to trade them, it is safest to seek confirmation first before trading.

Basic Trend Identification

Identifying trends is a fundamental yet simple concept. It can be used as a profitable trading strategy in its own right. Trends are a key concept in markets and are particularly important in fixed odds trading. They are one of the most reliable indicators of future market direction. Trends exist in all timeframes and across all markets and are classified in one of three ways:
Uptrend In an uptrend an asset rallies, often with intermediate periods of consolidation or

minor movements against the trend. It will show a series of Higher Highs (HH's) and Higher Lows (HL's) on the chart. If you cannot see it and it isn't obvious, then it probably isn't there. Don't try and convince yourself you can see a trend that doesnt exist.
Downtrend In a downtrend an asset declines, often with intermediate periods of

consolidation or minor movements against the trend. It will show a series of Lower Lows (LL's) and Lower Highs (LH's) on the chart.

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Non-Trending (Range Bound) - The price of the asset will often swing back and forth for long

periods between defined upper and lower limits. There will be no apparent directional movement of the price (HH's & HL's or LL's & LH's). This is sometimes referred to as sideways or range bound market. We always pay particular attention to trends especially on the weekly and the daily charts.
If you cannot see it and it isn't obvious, then it probably isn't there. Don't try and convince yourself you can see a trend that doesnt exist.

How to Identify a Trend

Moving Averages

To help us establish the current trend within a market we can make use of the Moving Average'. There are several variations of the moving average. We prefer the Exponential Moving Average (EMA). The EMA is very similar to the Simple Moving Average (SMA) with the difference being that it is weighted so that recent prices have greater significance. The Moving Average tends to be one of the most commonly used indicators in chart trading. Plotting the moving average on a chart helps to smooth out the day to day noise of the market and gives us the average price over a specified time period. By flattening out fluctuations in movement, we can see what has been happening on normal days of trading. With the moving average plotted we can instantly see whether an instrument is trending up or trending down. This helps us to anticipate the most likely direction that the market will move in the coming days and weeks. Common periods used to calculate the moving average are 10, 20, 50, 100 and 200 days. It is a matter of personal choice and trial and error as to what suits you and the timeframes you are trading. As virtually all chart packages will allow you to add more than one moving average to a chart at any one time, it makes sense to plot more than one.

We use the following EMA's on our charts (some login applies): Daily: 10, 40 & 200 day. The 10 day EMA gives us a 2 week view (10 working days), the 40 EMA a 2 month view and the 200 EMA approximates an annual view. Weekly: 10 & 40 day. The 10 EMA on this timeframe gives us a short term (just over 2 months) view and the 40 is roughly equivalent to the 200 day EMA on the daily chart.

Different Moving averages on the same chart help give a good indication of price movement over short, medium and longer periods of time. This way we can identify both shorter and longer term trends in the market at a glance.
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Golden Crosses

Plotting multiple moving averages on the same chart can help in identifying when the short term trend is changing. One of the most common methods used in this respect is to identify when a moving average from a shorter timeframe intersects and crosses that of a longer timeframe (commonly referred to as a 'Golden Cross'). This indicates a change in the current trend and can be useful when looking to time the entry of a trading position. Similarly, when we see the closing price of a candle close above a moving average we can also conclude that the recent price action has been Bullish. A close below a moving average is a warning of short term weakness.
Trend Lines

Once we have identified a trend using basic identification and moving averages we can mark the boundaries of the trend by the use of trend lines. There is no particular formula for marking trend lines. The more you look at charts the more you will be able to identify them. Trend lines should be plotted across the Highs and Lows of the market action to accommodate the full range of movement. To add them to a chart you can simply draw them on with a line tool. Alternatively, you could always print the chart and mark on key lines with a pencil and ruler, the old fashioned way! We like to have at least 3 touches to draw a trend line. These do not have to be precise but the more precise, the more supportive the trend (line) will be. A general rule is that, the more touches a trend line has, the stronger the trend is likely to be. BetOnMarkets offers basic and advanced real time charts and tools for both beginners and advanced traders alike. Open a BetOnMarkets account to draw up customized charts using all the above mentioned indicators.

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Trends Putting It All Together

In the following example we illustrate all of what we have discussed in relation to trends. CHART - Daily GBPJPY Trends Putting It All Together

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

HL indicates previous downtrend (of LLs/LHs) is ending. HH indicates the downtrend is over and a new uptrend may be starting. 2nd HL and drawing of new trend line confirms downtrend is over. Golden Cross (10 EMA crosses 40 EMA) Note: 40 EMA flattening out too. 2nd HH (in combination with all other factors) confirms new uptrend. HH/HL combination intact. Trend line held. HH HH/HL combination intact. Trend line held. HH HH/HL combination intact. Trend line held. Failed to make HH, but note, this is only one indication the trend MAY be ending. HL, trend line held. Push through previous Resistance level (see later) reconfirms uptrend still in place and still strong. 14. Strength of uptrend confirmed by a new HH.

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Over several months the trend line confines the limits of the price action to the downside in this clearly evident uptrend. Each time the price reaches the trend line it reverses back giving plenty of opportunities to place profitable 'No Touch' trades. Notice also how the 40 EMA is always favouring the uptrend.

How Long Do Trends Last?

Trends tend to persist over time and can last days, weeks, months or even years. A longer term monthly trend may contain several shorter term trends within it. As with support and resistance levels (that we will look at next), a general rule is that the longer the timeframe, the stronger the trend. Therefore, it is important to take account of the bigger picture on longer timeframe charts when assessing trades, as this is likely to eventually persist. Check for established trends running weekly, monthly or over a number of years. Even when a short term trend breaks down, longer term trends are likely to persist.
An indication of a trend ending, or coming to an end can be any combination of the following in no particular order: Price fails to make a HH/HL in an uptrend or a LL/LH in a downtrend. Longer term moving average flattens out. Trend line (to the downside) is broken, reverse for an uptrend. 'Golden Cross' occurs.

If one or the above occurs BEWARE! The current trend may be coming to an end. This is even more significant if more than one of the above are occurring at the same time. If they have all occurred, it is almost certain that the previous trend is over and a new one has begun.

Advanced Techniques
AVERAGE TRUE RANGE (ATR) Reference to the average true range is not included within these strategies as it is not an integral part of the actual strategies. However, it should be utilised when seeking out those No Touch trades. We would be looking at two safety factors here: The No Touch level is at least one days full ATR(14) away from the current price. Thus, if the current price is 1.4000 and the No Touch level is 1.3850 we would be looking for the ATR(14) on the daily chart to greater than 150. This gives us leeway, in that, assuming we have predicted the correct direction, market volatility will not take our trade out in the next 24 hours.

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The No Touch level is at least half the weekly ATR(14) away from the current price. Thus, if the current price is 1.4000 and the No Touch level is 1.3850 we would be looking for the ATR(14) on the weekly chart to be less than 300. This gives us additional comfort that in the next 2.5 days, even if the market direction has been predicted wrongly, there is sufficient distance in the market for the trade to run.

Chart - GBP/JPY Trading the Trend Up Trend

Point 1 is the first indication that the previous downtrend was coming to an end, as a HL was made. This was further confirmed at point 2, the 1st HH, at point 3 the 2nd HL and at point 4 the Golden Cross (10 day EMA crosses the 40 day EMA). Finally, at point 5, we get our 2nd HH and the new uptrend is confirmed and underway. At this stage we have used and applied our basic tool set - basic trend identification, moving averages and golden crosses. Lastly we draw the trend line. There is now, no doubt, that we have a new uptrend in place. So now we need to identify how we can trade the trend. We still need to apply and use our basic tool set, but in addition, we will also reference some of our other indicators. Open a BetOnMarkets account and access the charting section to try to identify a trading opportunity similar to the one described here. Long-term bets like the No Touch 7 day trade may be easily placed on BetOnMarkets.com

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Point 6 - TRADE OPPORTUNITY - Bounce off the trend line. Long (candle) wick, HH/HL still intact, 40 Day EMA still indicating an uptrend and the 10 day EMA nowhere near crossing. Ideal trade 7 day No Touch below the low.

Note: In this example, we have confirmation from the stochastic cross-over coming out of an oversold position. For those with a keener eye we can also see bullish stochastic (hidden) divergence, indicated by the straight black line on the stochastic indicator. Point 6a - TRADE OPPORTUNITY - Although not as obvious as the previous trade opportunity, this trade is still valid. Price action bounces off the 40 day EMA, 2 long candle wicks are evident and HHs/HLs are still intact. Ideal trade 7 day No Touch below the lows. Note: Even if this trade wasnt taken at this point, an engulfing candle the following day, would have given further indication of an entry point. Point 7 shows another HH and then point 8 - TRADE OPPORTUNITY Although this long wick does not bounce off the 40 day EMA or the trend line, it is nevertheless a HL. Confirmation comes the next day in the form of an engulfing candle. Ideal trade 7 day No Touch below the Low - although this trade may not have offered a high enough return for some. Point 9 shows another HH and then point 10 TRADE OPPORTUNITY - bounce off the Trend line, long (candle) wick, HHs/HLs still intact, 40 day EMA still indicating an uptrend, 10 EMA nowhere near crossing. Ideal trade 7 day No Touch below the Low. As mentioned previously, point 11 fails to post a HH, however, it is only one indication that this uptrend MAY be ending. At point 12 we get another TRADE OPPORTUNITY - the engulfing candle found support around the 40 EMA and the trend line. It also closed above both the 10 Day EMA and the 40 Day EMA. Ideal trade 7 day No Touch below the low. Note: In this example we have confirmation from the Stochastic cross-over from an oversold reading and again, for those with a keener eye, bullish stochastic (hidden) divergence, indicated by the straight black line on the stochastic indicator. Use the Interactive Charts on BetOnMarkets.com to try to identify an oversold or overbought reading. Try to create or customize your own charts; apply your own Stochastic indicator.

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At point 13 we push on up through previous resistance to a HH at point 14. This helps to confirm that the previous failure (point 11) was a blip.

Remember, we always assume a trend will continue unless we get strong confirmation otherwise. Look for supporting evidence from as many items in your tool box as possible. The key is not to wait for all of them or you will never place a trade. No single indicator is always right so there is little point waiting for all of them if you already have sufficient supporting evidence in your favour.

Chart - USD/JPY Trading the Trend Down Trend

The same principles used when trading an uptrend apply equally when trading a downtrend. In this next example, we already have an established and clear downtrend, so we concentrate on identifying, once again, how we can trade the trend.
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Point 1 - TRADE OPPORTUNITY - This is not the clearest of opportunities but, nonetheless, it is an opportunity. Perhaps one for the experienced (or the brave). Some characteristics here are the 10 day EMA holding, the Spinning top candle formation, LLs/LHs still intact, 40 day EMA still indicating a downtrend and 10 day EMA nowhere near crossing. Ideal trade 7 day No Touch above the high.
Sign up today to place a 7 day No Touch trade!

Point 2 - TRADE OPPORTUNITY - If the opportunity above was missed, this signal is much clearer. It has most of the characteristics of the above with the added benefit of the engulfing candle. Ideal trade 7 day No Touch above the high. Point 3 - TRADE OPPORTUNITY LLs/LHs still intact, 40 day EMA still indicating a downtrend and 10 day EMA nowhere near crossing. The 10 day EMA doesnt quite hold here, but the engulfing candle (with a close below the 10 day EMA) and bearish stochastic (hidden) divergence (and imminent cross-over) provides plenty of support for this trade. Ideal trade 7 day No Touch above the high. Point 4 - TRADE OPPORTUNITY - This trade would probably not have been taken but the setup here is worth pointing out. LLs/LHs are still intact (although there is a slight question mark here due to the volatility), 40 day EMA is still indicating a downtrend and 10 day EMA nowhere near crossing. The 10 day EMA doesnt quite hold here but again we get a close below it. There is bearish stochastic (hidden) divergence present. As mentioned, this is probably a trade that would not have been taken. This is an example of how you could try to make or force a trade. In this case, it had a positive outcome but we would more than likely have avoided this setup. Point 5 - TRADE OPPORTUNITY - We really like this setup. LLs/LHs intact, 40 day EMA still indicating a downtrend (although it is starting to flatten out) and 10 day EMA is nowhere near crossing. The trend line holds perfectly, candle has a long wick, bearish stochastic divergence is present and RSI is approaching Overbought. Ideal trade 7 day No Touch above the high. The remaining points are not trading opportunities; they are included to illustrate the end of a trend. Point 6 - HL, breaking the sequence of LLs/LHs, the first indication that the downtrend is ending. Note: this is an indication, not confirmation; it does not mean we will not stop looking for trading opportunities with the trend. Point 7 - Trend line is broken and a new HH is obvious. This is enough to stop us looking to trade with the trend unless we find strong evidence that it has resumed. The over-shoot of the trend line may be just that.

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Point 8 - This now provides us with sufficient evidence to wait on the sidelines. This is the 2nd HL, the trend line is broken and the 40 day EMA has clearly flattened out. Point 9 - Confirmation. A Golden Cross forms followed by a push to a 2nd HH. The downtrend is over and a new uptrend is officially in place.

We included this review of a trend ending just to illustrate that trading is not all about trading. It is also about keeping your eyes open. If you do not spot these things happening you may well continue trading with a trend that is in jeopardy of ending or, even worse, that is no longer in existence.

Click here to open a BetOnMarkets real money account now and to practice what youve learnt!

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Bonus Trading Supplement: Recommended Chart Set-Ups

Indicator EMA (10) EMA (40) EMA (200) Stochastic (5,3,3) RSI (14) ATR (14) Daily Yes Yes Yes Yes Yes Yes Yes Yes Yes Weekly Yes Yes

Yes really, thats all the indicators we have on our charts. Remember to keep it simple! It is far easier to profit from something you understand correctly than from something you dont! Understanding the basics will keep you in good stead and allow you to profit time and time again from the markets!

Applying Technical Analysis

One thing that should be stressed is that no one indicator will give you accurate signals all of the time. Indicators can and do produce false signals. That is why we make use of multiple indicators AND price action to confirm trading opportunities. As you develop an eye for reading charts you will become more accustomed to the subtleties of interpretation. Never just jump into a trade simply because a market is looking oversold or overbought. Instead, look first at the fundamental picture and check for any reasons that this may change. Markets can and do remain overbought or oversold for long periods of time, so it is important that you get confirmation of your signal before trading. By combining the reading you get from different indicators (but not too many) you can minimize your risk.

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Key Points
Stick with the key indicators and try to select one or two that work for you. No single indicator is correct 100% of the time. By combining indicators you can add confirmation to your signals and reduce the risk of your trading approach. Dont use too many indicators as this can cause analysis paralysis and confusion. Always remember that Technical Analysis is an art not a science. The final interpretation is always subjective so it is better to seek confirmation from the market rather than trying to second guess a trading opportunity. Never try to convince yourself that an opportunity is there when it isn't obvious or clear. Remember: It is better to be out the market wishing you were in, than in the market wishing you were out!

Click here to open a BetOnMarkets real money account now and to practice what youve learnt!

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Disclaimer
Information and strategies contained in this guide are intended as educational information only. International currency, stock index or commodity prices can be highly volatile and unpredictable. The past is not a guide to future performance and strategies that have worked in the past may not work in the future. Fixed odds trading involves a high level of risk and may not be suitable for everyone. The value of any trade and income derived from it can go down as well as up and your capital is at risk. You should only speculate with money you can afford to lose. If you are unsure as to whether this form of trading meets your investment objectives or you have concerns or queries concerning the suitability of this guide then please seek your own Independent Financial Advice. The application of any techniques or educational information contained within this guide is done at the trader's own risk and discretion. The authors and publishers of this guide shall not be held responsible for any loss of any kind or nature, no matter how this loss is caused, as a result of using information contained within this guide. The authors and publishers shall, in no way, be held liable to any party or person for any direct, indirect, punitive, special, incidental or other consequential damage that arises directly or indirectly from any use of this material. This guide is provided as is and without any warranty. Although due care has been taken in preparing this guide, the authors and publishers disclaim any liability for any inaccuracies or omissions. All rights reserved. This guide is copyrighted. Under no circumstances, may any part of this guide be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without the written permission of the publishers, except where permitted by law. Information and materials in this guide and our materials (including our website) may contain information included from or based on Forward-Looking Statements within the definition of the Securities Litigation Reform Act of 1995. Tax laws and rulings may vary from country to country and are subject to change at any time. It is each individuals responsibility to verify the tax legislation laws in the area in which they reside. Fixed odds trading is not currently regulated by the Financial Services Authority (FSA). BetOnMarkets is a registered trade name.

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