As I noted in Forex Trading: Seeking the Path of Least Resistance – A Common Sense Way ti Trade
The forex market is on a constant search for the path of least resistance, whether it be on the up or downside for a currency. A trend starts like the gently flowing stream, picks up momentum as with the cascading water, and then reaches a climax when it hits the waterfall.
It would be so easy if we had access to the order flows. The reality is we are outsiders and will rarely if ever get access to the order flow in he market. Even when you get information on the relative number, size + price levels of buy/sell orders, assume you are the last to know.
However, you don’t need t know the details of a real market order. You can get a clue to the order flow by identifying the path of least resistance.
So, the question is how to find the path of least resistance.
!) Get in touch with what news/themes are driving the market and what would continue trends and what would cause them to pause or reverse. Examples are interest rates (e.g. watch bond yields), economic data (be aware of the consensus forecast and what would be a surprise), geopolitics (hardest to predict and trade), upcoming events (central bank meetings, key speakers, elections). How a market reacts to news will give you a clue as to the strength or weakness of a currency.
2) Read your charts. This is the easiest way to pick out the weak vs. the strong currencies/trends. It can be as straightforward as using moving averages, trendlines, lower highs/lower lows, or whatever makes sense to you to pick out where the risk lies. The weak spot and path of least resistance is often where there are stops as this is what the market will go after. Charts will tell you what levels the market is targeting. This will show you the path the market is traveling and then the test comes when a target is achieved, broken or fails.
3) Another way is to find a tool that shows you the strong vs. the weak currencies at any point in time. It can be a heatmap or just visually scanning the net changes on the day to identify the outperforming or underperforming currency
4) Keep an eye on longer-term charts to see what currencies or crosses are showing momentum in trends.
A look at this GBPJPY chart shows a path of least resistance that not only gave a clue to the cross but to the two pairs that make it up (i.e. GBPUSD x USDJPY = GBPJPY)> In this case, GBPJPY rose sharply. In this case both USDJPY and GBPUSD both moved higher. When you see two currencies move in opposite directions vs. the dollar it indicates that there are real cross flows following the path of least resistance (other times you might see one currency lag another).
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