FX TECHNICAL ANALYSIS Figure 1


As higher timeframes are assumed to be the driving force of those beneath it, we always start our analysis on the monthly charts and work our way down. Once the trend of a higher timeframe has been identified, the trend is assumed to continue until signs of weakness appear. Yet for a sign of weakness to turn into a reversal, a trend in the opposing direction needs to form.


Trend Strength


The leng th of phase 2 in relation to phase 1 leaves clues for a trend’s streng th.


By monitoring the depth of a pul lback, we can quickly assess the underlying strength of the trend, be on the guard for a correction or reversal.


Figure 2 Trend Components


The true definition of a trend is the formation of higher highs and higher lows (for an uptrend) or lower lows and lower highs (in a downtrend). They’re also referred to as peaks and


troughs, terms


we’ll use interchangeably throughout.


Each peak and


trough is connected by either a phase 1 or 2, where phase 1


38 FX TRADER MAGAZINE July - September 2017


is assumed to be longer than phase 2 (as this is corrective). As soon as we see our phase 2 trough trade beyond a phase 1, the trend is no longer intact.


Yet the example on paper is often easier


than the reality of


an actual chart, as traders can be thrown around as volatility picks up at turning points and false breaks or unsuccessful reversals can occur.


In a strong trend, we expect to see shallow pullbacks and a clean break of the prior peak. When markets get a surprise it often results in markets moving very fast over a relatively short period of time which means phase-2 waves will be very short in depth.


Yet a weaker trend will provide much deeper corrections, which is usually a tell-tale sign of a corrective move or


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