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Forex Trading Strategy – Trend Trading

Forex Strategy

 Forex Trading Strategy – Trend Trading

How often have we heard the expression “The trend is your friend”?

Well apparently not enough, because trading alongside the trend is one of the safest ways to trade and a great Forex strategy for maximizing profits. FXML’s top analysts use trend trading as one of their leading trading strategies and always check which side of the trend they are on before making a trade or signal.

Trends come in different shapes and sizes; some are channels with parallel upper and lower trend lines, but the most common trends we encounter are trends with only one trend line. A trend with only one trend line will have a trend line acting as support in an uptrend and a trade line acting as resistance in a downtrend. We should keep in mind that due to the human nature of the market, trends don’t always follow a perfectly symmetrical trend line, so when trading we should be flexible and react to the actions of the market.

The main idea behind ‘Trend Trading’ is picking a top or a bottom. Novice traders tend to think that trend trading is easy; just find the trend and trade alongside it. In practice, it’s not that easy, as with all other aspects of this game, many dilemmas pop up when trying to identify the trend, some of the question that come up may include:

  • Is this a new trend or just a retrace?

  • Am I too late to get in on the trend?

  • Is the risk/reward ratio worth taking?

These are some of the questions we ask ourselves when trying to identify and trade trends. By incorporating a thorough analysis, we can overcome these dilemmas and get a better view of the bigger picture of what is going on and what is to come.

Is this a new trend or just a retrace?

To see if what is forming is a new trend or just a retrace of the current trend we have to wait for the trend to form and break specific levels. If we don’t, we might be jumping in at the end of a retrace and then the price will reverse and go the other way. On the GBP/USD weekly chart below we can see the price being rejected at the previous lows, but we can’t place a long in yet as we are unsure whether a real trend is forming. The confirmation of a real trend comes after the break and close of the long black line which is a previous long term support.

Am I too late to get in on the trend?

The most daring traders might want to catch the trends early, so they have to anticipate the price moves. We can see on the GBP/USD monthly chart below that the pair has been trading in a closed range after a downtrend. There are two monthly pin candles, (Don’t know what pin candles are? Click Here to learn), that shows that there is strong buying pressure around 1.48-49 level. In additional there is divergence on all three indicators, MACD, Stochastics and RSI. So that is a confirmation that a new trend is forming.

Is the risk/reward ratio worth taking?

To get a better risk reward in trading trends we should first see the potential of the direction we want to enter, long in this case. In the monthly chart below we see that the pair used to trade around 2.1, 5 years ago and after a big fall it traded in the 1.60 – 1.70 range for most of the 5 year period. This gives us a 2000 pip potential target and around 350 pip potential loss making the risk/reward ratio about 1 to 6.

gbpusd-w1

The price is being rejected at the previous lows, but we can’t place a long in yet as we are unsure whether a real trend is forming.

gbpusd-mn1

Two pins indicate strong buying pressure which means an uptrend is about to begin.

Identifying the trend isn’t all we have to do, after we have identified the trend we have to decide which strategy we should follow. There are 3 major strategies for trading trends:

  1. Enter and Let Run – This strategy is for the most conservative traders who don’t like to risk much or take risks very often. As the name indicates it consists of placing a trade after identifying the trend and letting it run its course. These kinds of trades, being conservative trades, are usually placed after the trend is confirmed, which is after the break of the support line on the daily chart.

  2. In and Out – This strategy is for the risk-moderate traders who like to raise the risk a bit in exchange for more profit. ‘In and Out’ strategy consists of placing trades based on the main trend but with smaller timeframe chart analysis (Learn more about using multiple time frames). Basically traders who choose to use this strategy take positions during the retraces on the smaller timeframe charts when indicators show the pair is oversold and unload them when the same chart shows it has reached overbought levels, indicating another retrace is due. The daily chart below shows the levels to get in.

  3. Adding Up – This strategy is for traders who want to take full advantage of the trend and milk every pip out of it. Enter a trade after identifying a trend, long in this case, and keep adding to that position on every retrace on the shorter timeframe charts. This is an extremely profitable strategy but you should be very cautious the higher it goes, because due to the amount of positions in the higher end, your profit can erode very quickly on a reversal and you might even end up with a loss.

gbpusd-d1

Oversold areas indicate opportunities for longs.

audusd-h1

AUD/USD is trading in an uptrend channel.

audusd-d1

AUD/USD is trading in a downtrend channel.

It’s not for nothing that all our analysts picked trend trading as one of their favorite Forex trading strategies. Learn how to spot trends as they are forming and learn how to distinguish a trend change from a retrace to master this strategy. Once you have mastered those skills all you have to do is choose which strategy to use and the trend will do your work for you, making you money.

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