Forex Trading - The Perils Of Trying To Find Highs And Lows

By: James Woolley

One of the most popular methods of trading when it comes to forex is to identify and trade overbought and oversold positions. However is this really the best way to trade the forex markets?

If you've been a trader for any period of time you will know that it is extremely difficult to catch the top or bottom of a market, and to do this on a consistent basis is even more difficult.

Even technical analysis experts struggle to pick out tops and bottoms of trading ranges on a regular basis, and although they may get lucky occasionally, there will be plenty of other times when they've entered a position too early or too late.

It's important to note that a currency pair, or indeed any financial instrument can remain overbought or oversold for a very long time, and may become even more so. Just because certain technical indicators signal a probable high or low has been reached, does not necessarily mean that this is the case.

For example, there may be several indicators such as RSI, CCI and stochastics, for instance, indicating that the GBP/USD pair is currently overbought and therefore ripe for shorting, but there's still no reason why it couldn't go 200 points higher into even more overbought territory.

Furthermore this is the case whether you're trading short term or long term. Yes it's true that forex pairs do conform fairly well to technical analysis, but there are always exceptions (otherwise we would all be millionaires).

The problem with this method of trading is that you are always fighting the trend, which is why I personally prefer to use methods that follow the overall trend.

However, if you do want to trade overbought and oversold positions, you can still go with the trend to some extent by waiting for a solid confirmation that a reversal is taking place.

This will mean that you don't catch all of a move but you will have added confidence in your trade that a true reversal is about to take place when you do enter a position.

For example you could use crossover indicators like EMAs, MACD and TRIX for confirmation.

Anyway the main point I want to get across is that trying to consistently find highs and lows is a difficult way of trading which is why you're better off either using a trend-following method or waiting for added confirmation if you do want to trade this way.

Foreign Exchange
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