It is relatively easy to make money in a trending market. Sometimes it’s as simple as watching which direction price is moving and trading with the flow. If you have a forex trading system that’s only profitable in a trending market, the worst thing you can to experience is a ranging market. In general, a ranging market could possibly devour the profits from a system developed around a trending market.

Now I’m not saying you cannot trade profitably in a ranging market. I am however saying it is more difficult. I personally would rather just not bother with a ranging market if I can hold out for the more profitable trending market.

There are a variety of indicators to help determine if price is range-bound.

ADX

The Average Directional Index indicator was designed to measure the strength of a trend. As such, if price becomes range bound the ADX level will decline. When ADX measures at 20 or below it is safe to assume that price is ranging. As the level increases the trend is gaining strength once again.

Bollinger Bands

Bollinger Bands are an excellent tool in determining if a price is either ranging or breaking out in a trend. Bollinger Bands measure the extreme of volatility with a currency pair. When the bands are wide and moving apart the volatility of the pair is greater and it is common to see that the price is trending in one direction or another.

However, if the bands are constrained and tight, volatility is low and price tends to bounce up and down in a tight environment. This is a good indication that price is range bound.

Price Action

All right, this one doesn’t require an indicator, but it is valid on it’s own. Simply spotting support and resistance in a tight area can help determine if a price is trending or ranging.

The above picture is a great illustration showing how price action alone can help you determine what a trending or ranging market looks like. After the retracement, price failed to break past the high of the uptrend. From there price went range bound.

Again I want to mention that there is nothing wrong with trading in a ranging market. It is just a wiser choice to avoid it if your trading system is dependent on a trending system.

The FX Trading Network has recommended a trading system that specifically hunts for trends. The Profitable Trend Forex System has proven to be a winner month after month. It currently averages 150 pips each week and there is currently an 8-week free trial. Get on board and start taking advantage of those highly profitable trends.

There is a fairly popular saying in Forex. Perhaps you have even heard it.

“The Trend is Your Friend.”

The reasoning behind the statement is that if you open a position in the direction of a trend, your rate of success will increase. However, for some traders, seeing the trend is not always that easy. Many times traders will ask me, “What indicator should I be using to know which way the trend is going?”

While there are dozens upon dozens of indicators with fancy names and complex mathematical equations, I believe finding the trend is a lot easier than you think. You simply need to just look at the chart. I recommend looking at 4HR charts or higher to verify the current trend in the market.

Above is a daily chart of GBPCHF. Watching price move across the chart, it is easy to see that the trend was initially moving upwards, dipped a bit, went up, and then dropped.

Of course, it is always easy to tell the direction of a price after it has already moved. But what tool could we use to tell us when price is going to change direction? It is as simple as a straight line, more specifically, a trend-line.

Above is the same chart as below. Except this time I drew a trend-line across the significant lows in the upward trend. There is really no wrong way to draw a trend-line. However, it is more of an art than it is a science. Let’s have an in depth look at how price reacted around the trend-line that was drawn.

Once the trend-line is drawn, the best way to see if it is a valid trend-line is if price respects it. When price hits the trend-line, it will do one of two things. Bounce back from it, or break through it.

Watch the area where price connected with the trend-line for the last time. Price dropped to it and couldn’t break it initially. The next day price shot away from it. At this point I would have poised myself to make a long entry if price would have continued past the high of that candle. However, it did not move upward but rather shot back down to the trend-line. This time the candle managed to close below the trend-line. This is significant as it is a strong signal that price is reversing and a new trend is beginning.

The very next candle did something extremely important. It shot back up to the trend-line and failed to break through it. Not only did it fail, but also it shot right back down. Price had respected the trend-line. And you can see what happened after that. It continued to drop as the days went on.

So skip all the fancy indicators. Trading does not have to be very complicated, and as shown all one truly needs is to know how to draw a straight line. The good news is that most brokers provide charts that assist with drawing trend-lines. It is a simple as connecting two dots and the trend-line is automatically drawn for you.

Always remember…

“The Trend is Your Friend.”

Most traders use indicators in their trading. However, very few actually know how the indicator came to be, let alone what information the indicator uses to make its calculation. When using tools of the trade, it’s important to understand where it derived from. If you are unaware of its purpose, then you are doing yourself a disservice. Always know what you are using and why you are using it.

You may have heard of MACD. It is short for Moving Average Convergence/Divergence. It is an indicator that has been around for nearly a half of a century. Renowned trader and financial author, Gerald Appel created it to help define trends.

MACD shows the difference between two moving averages. Generally one is a fast moving average, while the other one is slower. The larger the difference, the stronger the trend one can expect.

During the 60’s, Sappel used EMA 12 and EMA 26. So to calculate the MACD, you would subtract the slower moving average from the faster. The total would be the MACD. Once this convergence/divergence was calculated, a trigger was needed to enter the trade. The 9 EMA of the MACD itself was designed to be the trigger.

To enter or exit trades you would wait for the MACD to cross the trigger price of the MACD’s EMA 9. Another way to trade is to look at the histogram of the MACD. The histogram was calculated by subtracting the signal from MACD. To trade utilizing the histogram, a trader would have to identify divergence in between the histogram and price itself.

A third way to trade it would be to wait for the to cross 0. So if the MACD was coming up through the 0 line, this would be represented as a bullish signal. Likewise a bearish signal would have the MACD line going down through the 0 line.

In the 80’s MACD was extremely popular as it was proving itself to be a reliable trading tool. However, as markets are always changing, in today’s market MACD generates numerous false signals if trading alone. One could even argue that MACD is entirely useless as a trigger signal itself. It does serve it’s purpose however by having an overall view of the market place. MACD is best used on a higher timeframe to get a general idea of a trend. A weekly chart is preferred, however a daily could be sufficient as well.

12, 26, and 9 are standard settings on nearly every trading platform that includes MACD. There are those that have experimented with a variety of different EMA values and have shown positive results. Feel free to experiment with the settings and see if you are able to re-energize MACD back into the forefront of our charting platforms.