There is a market adage that describes the modus operandi of almost all currency traders: “The trend is your friend.”
Granted, that is often the case. However, to make it more truthful, we have added the corollary “unless the trend is about to end.” This qualifier has never been more appropriate for the forex market than in recent times.
Markets will trend, but research proves this is the exception rather than the rule. Overall, markets trend 25 to 30 percent of the time, which means 70 to 75 percent of the time they move within defined trading ranges.
Historically, currency markets were more likely to trend than traditional commodities, financial, or stock markets because policy decisions made by central banks were coordinated, and these collective actions influenced currency relationships for extended periods of time. In recent years, however, that interdependency has diminished and currency price behavior has mimicked that of other conventional markets.
Psychologically, it is simple to buy an advancing market and sell a declining market. Most traders attempt to operate in harmony with the trend, and the news associated with such price movement serves to reinforce that tendency and provide an excuse for its perpetuation. This is simply human nature –– all of us want to be on the side of a winner, and the news accompanying a trend is written to justify its existence. Eventually, however, the trend exhausts itself and, almost by default, it is reversed or, at least, interrupted.
Typically, stock specialists, market makers and brokerage trading desks supply needed liquidity by positioning themselves against the prevailing trend. Their collective countertrend activities are responsible for price exhaustion periods.
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