Everything You Need to Know about Forex Trend Trading
What is Forex Trend Trading?
Forex Trend trading, as you might suppose, means looking for price movement in a particular direction, then entering a trade as close to the starting point of the trend as you can. You then wait for the trend to run its course, and exit as close to the end point of the trend as you can.
This sounds very simple, but, like so many things in forex trading, it’s not. You will have heard forex traders use the expression “the trend is your friend.’ The problem is, that’s only the first half of the expression; the entire expression is “the trend is your friend until it ends.’
That’s the real story, and forex traders must adapt to it because the challenges in forex trend trading are identifying the strength of a trend and then determining the entry and exit points.
How to identify a trend
The first step in trend trading is to determine a trend.
The place to start is to ‘zoom out’ to a longer timeframe on the charts and see what is happening there. If you are trading the 15-minute chart, and you think you spot a trend, then ‘zoom out’ to the full-day chart, and see if it is there. If it is, great, you’re on to something. If not, try the 5-hour chart, and see if it is there. If you get down to the 1-hour chart and don’t spot it, you probably shouldn’t trade on it.
More detailed trend-spotting comes with the use of moving averages. A moving average crossover, for example: When a short-term price is moving average rises above or drops below a longer-term moving average, there is a strong probability of a long-term trend. A long-term trend on the 5-minute chart will be quite short, while one on a full-day chart could last weeks. To reduce risk further, look at the stochastic indicators that are on your trading platform – the MACD and the RSI are good ones for trend-spotting, but there are many others. If the indicators confirm the direction of the price movement, you have an even better chance of succeeding with your trade.
The ADX indicator deserves special mention. The ADX shows the strength of a trend, i.e., when it is gaining or losing momentum. This is very helpful for entry and exit decisions. The ADX indicator shows three lines: The ADX line that tells you the strength of the trend, the green line which shows bullish strength and the red line which shows bearish strength.
Another forex trend trading indicator is price action. Is the currency pair price going higher than the last high, then bouncing back to a low that is below the last low? If so, and especially if this action is repeated, you have a good chance of spotting an upward trend. It works vice-versa for a downward trend; first a new low point, then a new high point, etc.
Draw a Trend Line
Keep track of trends by drawing a trend-line. There is a tool for trendlines available on your platform that makes it easy. Click where you think the trend starts, and then follow it up or down with the line as far as it goes.
Trendlines are handy because if a trend changes, you can see it almost immediately in the divergence from the trendline. But don’t act too fast! There are always bumps along the road to a long-term trend.
Build Your Trend Trading Strategy
A trend strategy is created by combining different elements from all the above forex indicators.
You may be a fan of the ADX indicator, and use it in tandem with price action. Or you may prefer to combine the ADX with moving averages.
Try different combinations, until you find the one that works best for you. You may wish to add more elements along the way, and if that helps, go for it.
The one thing to avoid is to combine too many disparate indicators and strategies so that making a trade involves endless calculations and considerations – so many, that you lose the opportunity.
Forge a strategy that starts with the long term, and then breaks down that decision-making into smaller bits.
It is always a good idea to retain a fundamental element in your strategy because otherwise, they can wreck your plans. Check to see what might move your currency pair in the outside world, be it an oil-price spike, an election, a budget or trade announcement, etc. If you see a trend and expect an event like an interest-rate hike that will support it, you have a good chance of success.