23 Juni 2013

Trend Detection in Forex Markets

Anyone versed in currency trading, or trading of any kind, will tell you that trend detection is important. Whether the forex market is trending up, down or sideways; it doesn't matter, it's the movement that counts. However, trend detection can be complicated and there are many tools available. Finding the right combination of tools to work for you is important.

Forex Analysis and Trend Detection

There are many tools available to the currency trader. Charts, graphs, forex news, regressions, trend lines, moving averages, Fibonacci (numerical sequences) and oscillators are all part of the tool box. No one tool is king; it's not possible. If it were, there would be a lot more successful currency traders. In fact, it's not really possible for a tool to identify trends. The key is to pick a few, learn them, watch them and develop a money-management strategy that works.

It's been proven again and again that forex markets are too free and random to apply trading strategies successfully. It always comes down to the savvy of the trader. You should never let someone or something tell you what to trade, the responsibility of due diligence and action lies with the trader.

"I don't believe that such a thing as a trend detector can actually exist as a tool. Trend detection is a human task; it is the investor who figures that some event of international relevance will be affecting the quotes of some of the currency pairs," says Armando Rodriquez, a forex analyst and software engineer.

Rodriguez, who also holds a PhD in physics and is an expert in Random Walk and Brownian Motion, adds that, "With movement comes opportunity; taking advantage of opportunity leads to profits."

Random Walk and Brownian Motion in Forex Analysis

There is a school of thought in forex analysis based on randomness. If this sounds familiar you probably are schooled in stochastic analysis of the stock and futures markets. Each day the market is open and currency trades there will be a measurable amount of "randomness." Over time, this randomness will form a range and within the range, movement remains random but upper and lower limits can be determined; from that, trading opportunities will start to show themselves.

How Can I Add This to My Own Forex Analysis

Rodriguez has been working on a set of analysis tools with Muhammad Hafeez, software engineer for Their tools, the Price Analysis Tool (PAT) and Temperature Charts, are available at the website

Hafeez says that, "The Price Analysis Tool performs analysis on quotes of currency pairs over a specified period of time and projects the same period into the future, assuming that the regression slope and the randomness will remain constant. Historic data alone cannot help forecasting the future. For example, recently the news agencies were reporting that Greece and Portugal may default on their national debt obligations; this may further bring the EUR down against the USD. The PAT will help the investor in quantifying this effect."

Temperature Charts Sound Hot

The Temperature Charts are based on Brownian Motion. When a flow or a trend occurs, the direction can be difficult to determine. When the market becomes volatile (warmer in the Brownian Analogy) short-term movements, which have no bearing on underlying trend, can completely mask market direction. Temperature Charts measure how hot or volatile the market is. On one hand, Temperature Charts can be used to warn against trading when it's too hot and trend is obscured. On the other hand, hot times mark market volatility and higher stakes for those who believe they know where the trend is heading.

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Tommy Hughes is a successful and largely self taught economy watcher and market speculator. He has extensive knowledge of risk management and asset allocation, stock and options trading as well as market analysis. Tommy has worked in the fast paced restaurant industry for over 15 years. Tommy also writes for food publications such as Becket Media's "Grilled" Magazine. Tommy enjoys mountain biking and brewing beer. Tommy lives in the Asheville, North Carolina.

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