“The trend is your friend” is one of the first market witticisms most new traders learn, with good reason: After all, buying pullbacks or breakouts in established uptrends and downtrends is the essence of many of the world’s most successful trading strategies. While those strategies can be successful in markets that are showing traditional uptrends or downtrends, the phrase provides little guidance for what traders should do in instances when there isn’t an obvious uptrend or downtrend, at least at first glance.
At a very high level, the essence of the saying “the trend is your friend” is that you should give the established trend the benefit of the doubt until you see convincing evidence that its changed. This principle can be applied to uptrends (higher highs and higher lows), downtrends (lower highs and lower lows), and even sideways trends (similar highs and similar lows).
AUD/JPY: A case study in rangebound trading
The Aussie/Japanese yen (AUD/JPY) currency pair’s price action over the last five months provides a picture-perfect case study of rangebound trading opportunities. Like many so-called “risk assets,” the pair peaked in January of this year before trending low through February and March. In March, the pair put in a high around 84.50 and 80.50, keeping the established downtrend intact. However, rates proceeded to put in similar highs and lows in mid-April and early May respectively, suggesting that the trend had shifted from a downtrend to a sideways trend.
At that point, astute traders could look to shift to more of a “sideways trend” trading mindset. In sideways trends, overbought/oversold oscillators are often used in concert with resistance/support levels to identify areas to sell/buy. As the chart below shows, a trader could have looked to sell when the stochastics oscillator reached overbought territory (above 75-80) while price was testing the top of its range (83.75-84.00) and looked to buy when the stochastics was oversold (below 25-30) and price was testing the bottom of its range (80.50-81.25):
Source: TradingView, FOREX.com
Of course, this is cherry-picked example of a pristine range that could easily break down in the days and weeks to come (in other words, “past performance is not indicative of future results”). Nonetheless, it serves as a good reminder that readers should keep their eyes out for opportunities to trade market’s true trend, whether it’s up, down, or even sideways.