In all securities markets, prices are trending, mean-reverting, or flat (going sideways). When prices are trending, just about any trend-following technique will work, even the hoary old moving average.
When prices are mean-reverting, you need to determine when an excursion away from the mean has peaked, and then “fade the trend.” There are a number of techniques to estimate when a price is overbought or oversold and will likely revert to the mean. But how do you know when a price is going sideways and you should do nothing? The price goes up just enough to trigger a buy trade using a trend-following technique, only to turn around and give you a sell signal. This is the dreaded whipsaw loss, which can accumulate enough to drive you out of the trading business altogether — especially if you are unlucky enough to detect a sideways period right at the beginning of your trading career.
This discussion of trendedness and mean-reversion in the Euro and Japanese yen will zero in on a case of sideways prices and how a particular technical indicator can help prevent ruinous whipsaw losses.
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