Trend trading is a simple forex strategy used by many traders of all experience levels. Trend trading is widely followed because of its simplicity to identify and trade and many times, strong tren ds can bail you out of an imperfect s et of buy and sell rules.
We will identify 2 benefits a simple trend following strategy offers plus an easy way to identify the direction of the trend using forex technical analysis. Before we get started, it is important to first explain why trend trading is a popular strategy used by many new and experienced traders. Strong Trends and an Imperfect Strategy. Do you have the perfect forex trading strategy? I have not found it.
To me, a perfect strategy wins all of the time and has minimal trade drawdowns. Therefore, learning how to trade in an imperfect world is very important. Trend trading is a simple way to cover up some strategy imperfections by identifying the strongest trends in the market.
When you trade in the direction of the trend, the rest of your trading approach can fall right into place. This doesn't mean that all your trades will be winners. It does mean that you don't have to be exact in your entries and exits once you find a strong trend to trade. When you see a strong trend in the market, trade it in the direction of the trend. Notice how each time CCI dipped below , prices responded with a rally. Not all trades will work out this way, but because we were following a strong trend, each dip caused more buyers to come into the market to push prices higher.
Therefore, experienced traders seek out more strong trends to repeatedly take advantage of the m. If you were going fishing and had a choice of ponds to fish in, which pond would you choose? How about the pond with more fish! Identifying strong trends allows us to see which pond is offering more potential fish to catch pips. Assume for a moment, you are the perfect trader that can catch the exact top and bottom of each wave. More Pips Available in the Direction of the Trend. Now, divide your trades into those with the trend and those against the trend and your chart may look similar to the above.
N otice how more pips are available on the long trades relative to the short trades. This is because this is a strong trend to the upside. By aligning with the direction of the trend, you align your strateg y to the momentum of the market and expose yourself to more opportunities at pips. To determine the trend, pull a price chart on a currency pair of your choice with between candles. Then answer the question of which direction prices are generally moving? If the trend is up, then confirm the direction by looking for a series of higher highs and higher lows on the chart.
A valid up trend would look similar to the above chart. Eventually, all trends will end. So this uptrend changes to a downtrend when a series of lower highs and lower lows are established as noted below.
If the trend is down, confirm the downtrend by looking for a series of lower highs and lower lows on the chart. Below is a chart of a valid downtrend.
This downtrend changes to an uptrend when a series of higher highs and higher lows begin to form as noted below. It is important to note that there are no specific rules for identifying high and lows to use for trend analysis. The idea is to pick the most obvious examples of an uptrend or a downtrend to trade. There are several advantages to trading strong trends such as allowing the trend to bail you out of an imperfect strategy and aligning yourself in the direction the pips are available.
This explains why many experienced and well known traders follow that strategy. Look for the most obvious trending moves. There are over 30 different currency pairs to choose and look for the strongest trend of those pairs. Filter your trading signals in the direction of the trend. Take only entry signals in the trend direction and ignore those entry signals that are counter trend. Now, that you have found strong trends to trade, follow the " 3 Ways to Trade a Strong Forex Trend ".
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Swing trading, chart patterns, breakouts, and Elliott wave Connect via: Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event. Forex Economic Calendar A:More...