By Sean Hyman Plenty of Forex traders get caught up in the daily price action in the markets. But the truth is you don’t have to trade currencies minute-by-minute, or even daily.

You can use several investment strategies to invest in currencies for weeks, months or even years. But to buy currencies for the long run, you need to know how to identify a longer-term trend in the currency markets.

So how in the world do you know how to spot the long-term trend in the Forex market? Well it’s really simple.

First, you should pull up a daily chart that goes back in time at least a year (or even longer is better).

Then place a 200-Simple Moving Average (SMA) on the chart. On the chart below, the grey line is the Simple-Moving Average (the one with the arrows). The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Let the 200 Day SMA be Your Guide!

The 200 SMA is one of the most widely used indicators in the world. I even catch purely fundamental traders using the SMA in their charts. Why? Because everyone needs to know where long-term trends are heading, even pure fundamentalists.

Above, I’ve charted the EUR/USD pair on the daily chart that goes all the way back to mid-2006. That’s a HUGE chunk of time when we’re talking about currencies.

The 200 SMA Smoothes out the Trend and Points the Way to Trade!

Towards the left side of the chart, you can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, the moving average smoothes this all out so that we can tell if the overall price is headed up or down.

To the left of the chart, you can see that the price continues to climb higher. This tells you that the EUR/USD was in an uptrend at that point. In other words, the euro moved higher vs. the dollar overall.

However, on the latter part of the chart (right side), the trend turns downward and you can see the euro fell vs. the dollar overall.

You want to define the trend’s direction and trade with it because that’s where the higher probability trades lie. Low probability trades would be shorting an uptrend or buying a pair in a downtrend.

You will notice that the price tends to trade at or above the 200 SMA in an uptrend and in a downtrend the price dips below the 200 SMA and holds at or below it.

How to Tell When a New LONG-TERM Trend Is About to Begin

Therefore, we’re alerted to a “new long term trend” emerging when the price makes this shift. We can see that in August of 2008 when the price fell below the 200 SMA. At that point, the long-term uptrend ceased and the “new” downtrend emerged.

Then in May of 2009, the uptrend re-emerged for the EUR/USD. As long as the pair can hold above this 200 SMA, then it’s still in its longer-term uptrend. Once the pair drops back below the SMA and holds below it, you’ll know that the uptrend has likely ended.

So let the 200 Daily SMA on the daily chart be your guide. You can use it to tell whether you should be looking for “long” (buying) entry opportunities or “shorting” (selling) opportunities.

Using this as your guide will enhance your trading performance. No matter how much you get tempted…don’t trade against this trend, but stick with it. Trade profits along the way if you like, but don’t bother trading against the trend.

Be patient and wait to reenter the trend once the pair retraces back towards its 200 SMA once again!

Happy Trading!
Sean Hyman, aka Professor FX

P.S. My colleague, Ashish has already recommended the perfect long-term play to take advantage of this long-term EUR/USD. Get all the details here.