Value-Based Forex Trading – Following Trends in Forex
Most retailers I know think more about the price of a can of soup than the price they are willing to pay for a euro or a yen. They will drive across town to save five cents a can, or ten cents a pound for avocado, but pay a premium in their foreign exchange transactions. It is easy to justify the price when it is based solely on technical analysis. Heck, if I can’t find an indicator that tells me to buy, I’m not much of a technician. The problem is that on the same chart I can also find an indicator that will tell me to sell.
Indicators are great. They give us a snapshot of what has happened in the last X periods. You can see the same thing on price bars or candlesticks if you study price charts long enough. I don’t use many indicators in my trading. I use some just to give my eyes a rest! After enough years of looking at charts, it starts to give you a headache. However, the indicators will not tell you anything that is not already in front of you on the chart. You have many options when it comes to indicator selection. There are momentum indicators, volume indicators, oscillators, hybrids, etc. The most important indicator on the chart is the “current price”.
Nothing in trading is more important to me than the current price of an asset that I intend to buy or sell. I have a price that I am willing to pay and I have an idea of the value of that asset. It’s a law of economics that basically says no one will ever buy an asset for more than it’s worth, and no one will ever sell an asset for less than it’s worth. If that law is true, and I think it is, then: A. One party is wrong, B. The asset has extrinsic value, or C. The buyer believes the asset will appreciate.
As a value-based trader, I buy an asset below my perceived value. That means that if my analysis of US and EU fundamental conditions tells me that EURUSD should trade at 1.6000, I am willing to buy that pair down to that level. Until something tells me otherwise, I will continue to buy that asset. Things change over time, and I’m not stupid. I will exit a long trade before I hit my stop loss. But really it’s about the value of the asset. Traders tend to forget that they are simply buying and selling something of value. They become too obsessed with a set of indicators.
I put a good amount of analysis into my trades. I never trade based solely on a technical indicator. I do a combination of technical analysis, fundamental analysis, and sentiment analysis before choosing a stock. Once I have value, my bias is to simply trade in the direction of value. I have always found this philosophy to put me in trend by following the trades. It always will. There is almost no chance that this type of analysis will put you in a trade that does not follow the trend.