My students are always after me to teach them how to use key technical indicators.

I usually tell them the same thing: Learning how to use them is just the first step. Learning when to use them…that’s the real trick.

After all, it’s one thing to know what a hammer or screwdriver does and it’s another to know the best time to use each one to get the optimal results.

In a similar fashion, traders learn how to use technical tools. But that doesn’t mean they know how to put all of the pieces together so they know when to pick and choose the best technical tool to evaluate a specific currency pair.

There is one simple tool I wish I had known from the beginning. ALWAYS follow this rule and you will stay “light years” ahead of many other traders out there…

1. The trend’s direction is THE most important indicator out there.

Sounds simple right? Well, it is. But many traders often lose sight of this very simple rule and try to trade against trends. That’s when you get in trouble.

So let’s talk about how to find the trends…

Here’s the easiest way in the world to determine a trend. I call it “trend trading with training wheels.” You can follow the trend just by tracking what’s known as the “simple moving average.”

This is an indicator that you can actually put on your price chart and it will “point the way” to the trend’s direction. It does this by smoothing out the jagged price action and showing you the overall trend where the pair is headed.

One of the more commonly used ones is the 50 day simple moving average (SMA). It can be found on any Forex charting package. Once you pull up the indicator on your charts, all you will have to fill in is the number of periods, which is “50.”

This will show the medium-term trend direction for a currency pair. Let’s take a look below to see what this looks like….

Finding the Trend: Not as Difficult As It Sounds…

So the trend direction is the most important thing to determine. If you never learn nothing else about technicals, learn that.

Because if you will trade in the direction of the trend with good risk management (not risking more than 5% of your account if stopped out in the trade), then you have a huge portion of Forex trading “licked” right there.

I’ll be back tomorrow with my second tool that I use to evaluate technicals. Till then…

Happy Trading!
Sean Hyman, Professor FX