Why You Need to Focus on Trading Episodes and Not Trends

Let me state from the outset that the forex market is one of limits. It’s a fickle market more prone to intra-day reversals than breakouts and sustained moves.

This is why I look at the forex market as trading in episodes rather than trends.

What is an episode?
What I mean by an episode is a period on a chart where a currency is trading with upward or downward momentum or in a consolidation range. Like a television episode, there is a beginning and an end. The skill is to not overstay your welcome and not trade an old episode when a new one has begun.

This is a critical concept to understand. You need to be in sync with the current episode. if you are trading an old episode when a new episode has started then you will find yourself on the wrong side of the market. This is especially true for day trading using shorter time frame charts where the bias to buy (or sell) can change quickly. One reason is that currency markets can be fickle and tend to have limits intra-day, even when there is a broader trend.

Reality check

The reality is that many traders find themselves trading the old episode as it is often hard to switch gears, even when charts tell you it is time to do so. An example is looking to sell a rally after a currency has bottomed or looking to buy a currency after it has topped out.

Take a look at the following two charts for illustrations of episodes and what happens when one episode ends and another begins (Source; The Amazing Trader)

GBPUSD: Shift from a down to an up episode

USDCAD: Shift from an up to a down episode

So, the question you should be asking is how to stay one step ahead of the market rather than one step behind. In this regard, As you can see by these charts, The Amazing Trader can provide you with invaluable clues for identifying the current episode.

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In any case, it is important to identify when a new episode begins and when it ends. It is also important to be aware of the broader trend as counter-trend moves (e.g. retracements) tend to end more abruptly than moves with the overall trend. This may seem like common sense but when you master this concept and put it into practice you should find yourself trading with the flow rather than fighting an old battle.