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Three Ways to Discern a Prevailing Trend in Forex Markets

April 08, 2012 | Comments: 0 | Views: 118

We have all had the experience of trying to carry on a conversation in a noisy room. Any sound that interferes with the conversation can be classified as noise. In the markets noise could be described as incidental data that makes it more difficult to discern the prevailing trend. Noise shows up as short little price moves that tend to make for messy charts. A trendless market could be classified as just noise, even though there are many ways to trade such markets.

Even when a strong trend is evident we still have to deal with noise. It's the noise that causes traders to be stopped out prematurely while riding a nice trend. Everything is going along smoothly and then there is that seemingly random price spike that takes out the stop. When the market bounces around your trend lines as if they weren't there, that is noise (assuming properly drawn lines).

The goal is to decrease the effect noise has on trading decisions. In other words the goal is to increase the signal to noise ratio, or phrased another way, the ratio of relevant price data to random price variations. One way to do this is to trade using longer time frames. On a one minute chart a small price move can have a significant effect on price patterns, while the same price movement will have a negligible effect on patterns on a fifteen minute chart.

If changing the time frame is not an option then filtering or smoothing the data is an alternative. This can be done using tools like moving averages or switching from a bar chart to another type of chart such as one using range bars or even Renko bars. My favorite approach is to use Renko bars but many popular charting software packages don't offer them as an option. Most packages do offer range bars as an alternative to simple time based bars or candles.

Another way to deal with noise is by modifying order placement. Placing stop loss points farther away from the market reduces the chance of exiting the trade due to noise. Adding some wiggle room to breakout entry levels will also reduce the chances noise related false entries. The downside to placing orders farther away from the market is that it will affect your money management plan as the amount of risk is increased. One advantage to trading forex is that you can adjust your value per pip to whatever amount is required to stay within your money management guidelines.

Taking the time to evaluate how much noise impacts your trading plan and the results from following will dramatically increase your profitability. It will pay handsomely to consider trading longer time frames, changing your charting approach, and moving your orders farther away from the market.

James Mason is an active currency trader who teaches forex trading through individual consultation and in a live trading room. For more information go to

Source: EzineArticles
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