Forex trend trading works best in a clear trend without sharp pullbacks. Traders need a system with indicators like moving averages and channel lines. They should stay committed to the trend and only change strategy in different market conditions. MAs help identify trends, and channel lines guide entry and exit points. Traders should pair strong and weak currencies and use proper risk management.
Forex trend trading will work best in a market that is clearly trending in one direction without sharp pullbacks in the opposite direction. An individual who wants to use forex trend trading will need a system that allows him to make the most of the trend. This system can incorporate indicators such as moving averages (MA), channel lines and many more. Also, the trader should stay committed to the trend until it wears out and should only change strategy when the market moves to other market conditions.
Using MAs in forex trend trading can allow the trader to quickly identify if the market is trending. If the market is trending, the MAs should be in what is called the correct order. This means that the shorter-term MA will be above the longer-term MA in an uptrend and the order will be reversed in a downtrend. In other words, the 10-day MA should be higher than the 20-day MA, which is higher than the 50-day MA, and the 50-day MA is higher than the 100-day MA, and so on. In a downtrend, however, the order will be reversed, i.e. descending from the longest period to the shortest period.
The foreign exchange market is notorious for trends that can continue for days, weeks, months and even years. The trader, however, should know that forex trend trading will likely fail in other market conditions, such as when prices are constantly moving up and down between resistance and support, also called range-bound or range-bound trading. When using trend following techniques in the currency market, the trader should stick with the trend to the end. He will be advised not to trade against the trend when the market retraces in an attempt to make quick profits. If appropriate, the trader can actually use pullbacks to increase his positions when the trend resumes.
Channel lines can be useful in forex trend trading because they can serve as a guide for entering new positions or taking profits. In an uptrend, the price of the currency can form a sort of zig-zag pattern as it rises; that is, when the price goes up, it will reach a new high, and when it moves down, its low will be higher than the previous low while staying inside a channel.
This pattern allows a trader to draw two parallel lines for a given period as follows: A line will be drawn to connect successive peaks of price movements. Another line will connect the price lows that are higher than the previous lows. In a downtrend, the whole process is simply reversed.
In an uptrend, the top line usually acts as resistance and the bottom line as support. The price will tend to move up to or near resistance, then pull back or near support, then resume its uptrend as it extends its overall uptrend. In an uptrend, for example, a trader can use the support level as a point to enter new positions. Also, when these lines are visibly breached, it indicates that the trend may be weakening and the trader should be prepared to act accordingly. The trader is also encouraged to remain flexible and adapt to new conditions when the trend is over and moves into a non-trending market.
Basically, the trader should pair a currency of a nation whose economy is strong against one that is weak. When a country’s economic condition is strong, its currency will likely be in a long uptrend. Also, the trader must keep in mind that all kinds of indicators and patterns in forex trend trading are never a sure thing. While the market has a tendency to follow and react to certain patterns in a particular way, it can also sometimes react unexpectedly. Therefore, the use of proper risk management is imperative to limit the risk in case of violent adverse moves.
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