DETERMINING TRENDS

                       Every trading day has a high and a low edge that you could potentially trade
along, but it isn’t efficient to do so. To increase your chances of selecting
a successful trade, the Sitcom System begins by determining a directional
trend bias through the use of a simple moving average indicator. The rules

for determining a trend are simple: When the market is trading above a
13-period smoothed moving average, the trend bias is to buy the currency
pair. When the market is trading below a 13-period smoothed moving average,
the trend bias is to sell the currency pair. I selected a 13-period
smoothed moving average because it responds to changes in price action
efficiently, and 13 is a number in the Fibonacci sequence. As I’ve said before,
I don’t believe in voodoo, but I’ll take all the help I can get. I suppose
if you are really superstitious, you could use 12 or 14 instead.
The period you select for your moving average is flexible. If you prefer
to use a 20- or 50-period simple moving average to determine a trend,
that is fine. The goal is to keep your trend analysis simple and focused on
where the market is currently trading rather than a lengthy trend analysis
that might not be in tune with price action over the next few days. Determining
trends in this manner is not an exact science; it’s simply a quick and
easy way to determine a bias to buy or sell based on where the market is
currently trading.

                        Figure 6.1 depicts a bias for both long and short trades determined
for the AUD/USD daily chart. In this example, the bias should be for long
trades; however, a short bias existed for a brief period of time while the
market traded below the moving average.
You can enhance the definition of a trend by drawing trend lines to
supplement the moving average. In Figure 6.1 the brief spike below the
moving average could have been ignored if the trader was sure he was on
the positive side of an uptrend. In other words, a trend line can act as a
filter on the trend bias created by the moving average, if you prefer. Trend
lines are discussed in Chapter 3.