Value Based Forex Trading – Trend Following in Forex

Most of the retail traders that I know put more thought into the price of a can of soup than they do the price they’re willing to pay for a Euro or Yen. They’ll drive to the other side of town to save a nickel per can, or a dime per pound for Avocado, but they’ll pay a premium price in their currency deals. It’s easy to justify the price when you rely on technical analysis alone. 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 past X periods. You can see the same thing in the price bars or candlesticks if you study price charts long enough. I don’t use a lot of indicators in my trading. I do use a few just to give my eyes a rest! After enough years of staring at charts, it starts to give you a headache. Indicators will not, however, tell you anything that is not already in front of you on the chart. You have a lot of choices 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 which I intend to purchase 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 that nobody will ever buy an asset for more than it is worth, and nobody will sell an asset for less than it is worth. If that law is true, and I believe it is, then either: A. One of the parties is wrong, B. There is an extrinsic value to the asset, or C. The purchaser 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 the fundamental conditions of the US and the EU tells me that the EURUSD should be trading at 1.6000, I am willing to buy that pair all the way up to that level. Until something tells me otherwise, I’ll keep buying that asset. Things do change over time, and I’m not a fool. I’ll exit a trade long before I hit my stop loss. But it’s really all about the value of the asset. Traders tend to forget that they are simply buying and selling something of value. They get too hung up on a set of indicators.

I put a fair amount of analysis into my trades. I never trade based on a technical indicator alone. I do a combination of technical analysis, fundamental analysis, and sentiment analysis before choosing a value. Once I have the value, my bias is simply to trade in the direction of the value. I have always found this philosophy to put me in trend following trades. It always will. There’s almost no possibility of this type of analysis putting you into a non-trend following trade.