Following trends is much easier said than done. For starters, no one knows how long a given trend in a currency’s price is going to last. Perhaps the currency has just started to go up in price, how do you know whether this is a short lived phenomenon or the real thing? Whoever said the trend is your friend obviously didn’t have very trustworthy friends or the portfolio prophet.
The best way to identify a past trend is to look at a price chart. But this doesn’t give us a whole lot of information about the future. We need more than just a look at where the currency has been pricewise; we need to know the market sentiment and the fundamentals behind the economy that is supporting the currency. If the fundamentals say that the currency is going to go up in price, then the trend that is just beginning can be taken a lot more seriously.
Directional bias is a key part of your trend following. These movements in price are constructed based upon consumer sentiment. If the chart is showing a confirmed upswing, the directional bias is an increase in value because consumer sentiment is that the currency is undervalued. An undervalued currency will continue to increase in price as demand for it grows. The trick to determining any directional bias is to try and pinpoint where the trend will end. If there is room for you to enter the trade, you will want to jump on the bandwagon. But if your calculations say the trend is near its end, then you will want to stay away from purchasing the currency.
