Forex trend trading will work the best in a market that is clearly trending in one direction without harsh pullbacks in the opposite direction. An individual who wants to use forex trend trading will need a system that allows him or her to take advantage of the greater part of the trend. This system can incorporate indicators such as moving averages (MAs), channel lines and many more. Moreover, the trader should stay committed to the trend until it is exhausted and should change strategies only when the market moves into other market conditions.
The use of MAs in forex trend trading can allow the trader to quickly identify whether the market is trending. If the market is trending, the MAs should be in what is referred to as the correct order. This means that the shortest period MA will be above the longer period MA in an uptrend, and the order will be reversed in a downtrend. In other words, the 10-day MA should be above the 20-day MA, which in turn is above the 50-day MA, and this is above the 100-day MA, and so on. In a downtrend, however, the order will be reversed, that is, descending from longest period to shortest period.
The foreign exchange market is known 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 the prices constantly move up and down between resistance and support, also called trading range or range-bound. When using the trend-following techniques in the currency market, the trader should remain committed to the trend until the end. He or she will be advised not to place trades in the opposite direction of the trend when the market retraces, as an attempt to pull quick profits. If suitable, the trader can actually use the pullbacks to add to his or her positions when the trend resumes.
Channels lines can be useful in forex trend trading because they can serve as a guide for entering new positions or taking some profits. In an uptrend, the currency price can form a sort of rising zig-zag pattern; that is, when the price moves up, it will reach a new high, and when it moves down, its low will be higher than the previous low while staying within a channel.
This pattern allows a trader to draw two lines that are parallel for a given period as follows: One line will be drawn to connect the successive peaks of the price moves. Another line will connect the price lows that are higher than prior lows. In a downtrend, the whole process is simply reversed.
In an uptrend, the line above will usually act as resistance and the bottom one as support. The price will tend to move up to reach resistance or close to it, then pull back to or near support, then resume its uptrend while extending its overall rise. In an uptrend, for example, a trader can use the support level as a point to enter new positions. Moreover, when these lines are visibly breached, it indicates that the trend might be weakening and the trader should prepare to act accordingly. The trader is also encouraged to remain flexible and adapt to new conditions when the trend is exhausted and moves into a non-trending market.
Fundamentally, the trader should pair a currency from a nation whose economy is strong against one that is weak. When the economic condition of a country is strong, its currency will likely be in a long uptrend. Furthermore, the trader needs to keep in mind that all types of indicators and patterns in forex trend trading are never a sure thing. Although the market has a tendency to follow and react to certain patterns in a particular way, it also can react in an unexpected way at times. Therefore, the use of proper risk management is indispensable to limit risk in the case of violent adverse moves.