ForeCastle

Talking Points:

• Trend Strategies can use a 200-period MA filter
• Range Strategies can use the ADX
• All other strategies can use the SSI filter

Filtering a Trend Trading Strategy

We’ve all heard the saying, “the trend is your friend” or “trade the path of least resistance.” These phrases are used by traders that want to trade in the same direction as the overall trend. But what if we have a difficult time locating the trend? What do we do if we are uncertain about our direction bias?

An excellent tool to add to a trend-based strategy is the 200-period Simple Moving Average. By averaging the closing price over the last 200 bars, we can see if the current price action is above or below the average.

The 200-Period Simple Moving Average



Anytime we see price above the 200-period moving average line, we should look for buying opportunities. Anytime we see price below the moving average line, we should look for selling opportunities. This ensures we are trading in the same direction as the prevailing trend.

We can also take note of the strength of an existing trend by how far price has moved away from the 200-period MA. The further the price is away from the average, the stronger the trend. This can be seen in the chart above. A strong downtrend followed by a more tame uptrend.

Filtering a Range Trading Strategy

With the current drop in Forex volatility, many traders have migrated over to using range-bound strategies. A range strategy attempts to buy low and sell high when price is moving primarily sideways. The only problem is that sometimes market dynamics can change, turning ranging pairs into pairs that may begin trending.

To mitigate range trading during these transition times, we can use a technical indicator called the Average Directional Index or ADX. The ADX is not a direction filter. It is a filter that tells us if a currency pair is currently in a trend our not. The higher the ADX, the stronger the trend is either up or down. The lower the ADX, the more the currency pair has been moving sideways.

The chart below shows a period of time where price was trending and later changed to ranging. The key level for ADX is 25. Whenever the ADX is below 25, we should focus on trading range bound strategies. Any reading above 25 is not as suitable for range trading, and could actually be suitable for trend trading if ADX moves high enough.

Range Bound when ADX is Under 25



By eliminating our range trades when ADX is above 25, we have a better chance at turning a profit.

Hopefully this article has given you ideas on ways to improve your own strategy, whether you are trading trends, ranges, or something entirely different.

Good trading!
---Written by Rob Pasche


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