In today forex faq, we have a question from one of our fellow readers. He is asking me whether he can make profits in trading forex simply by consistently entering SHORT trade during period of strong downtrend.
I bet he got this idea due to the strong downtrend that he is seeing on the EURUSD recently. In fact, the EURUSD has been on a dowtrend since May 2014 but can you really make consistent income simply by entering SHORT trade?
From a zoom out point of view, you can see that the EURUSD is in a very strong downtrend at the moment but if you zoom in to take a closer look, you can see that there are times where they make very big retracement.
Therefore it is only possible for you to make consistent profits if you are able to enter the SHORT trade at the right time which is very difficult due to the nature of the market. That is why you need to have a strategy that allows you to ride the trend of the market. However you need to realize that there is no strategy that can ride the trend of the market with 100% accuracy.
Let me show you a few examples
1) 9th January 2015
Let us take a look at the picture below, you can see that the price is in a strong downtrend and once it hits the 200 EMA which is a very strong resistance level, the price started to move down.
If you decided to enter a trade at the point of the next testing of the 200 EMA, you will realize that the price moved up 50 pips and starting to go into a range formation instead of continuing in its down move. If you enter a SHORT trade consistently planning to profit from the down trend during these ranging period, you will realize that you get stopped out pretty often.
Therefore trading is not as simple as just following the trend, you need to have a good trading plan that will tell you when and where to enter a trade. With that said, you can also get into a losing trade even when everything is according to your trading plan as there is no strategy that wins 100% of the time.
2) 16th January 2015
Even when the price is in a strong downtrend, there are times where you will see the price making sharp upward movement. Imagine you enter a SHORT trade at this time, you will be stopped out.
Most trader failed to realize that there is a possible 1-2-3 bottom formation that is going on at that point.
There is a chance that the price will pushed up to test the 1.15618 resistance level for the formation.
If you take a close look at the picture below, you can see that the price came up to test that level and break through it. Subsequently it moved another 72 pips upwards. If you enter a SHORT trade, you will be stopped out.
Do note that trading is not as simple as just enter SHORT trade during strong down trend, you need to have a proper trading strategy which will tell you how to trade the trend. It will give you a clear and exact point when to enter and when to exit the trade. There is no way you can make consistent income from trading if you do not have a good trading strategy on hand.