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Be Fashionable: Trade Trends

By , Head Forex Trading Instructor
06 July 2012 03:10 GMT

There is a common trading expression “The trend is your friend.” Phrases such as this have stood the test of time because they are critically important to any trading plan. This article will show you how to identify trends using price charts and 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. Experienced traders know when they find a strong trend and trade in the trend’s direction, it can make trading easy. Therefore, experienced traders seek out more strong trends to repeatedly take advantage of them.

For example, if the market is moving up in a strong trend, it isn’t as important what the strategy is used to time entries, you simply need to be buying. 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.

Secondly, there tend to be more pips to be made in the direction of the trend than against the trend.

Be_Fashionable_Trade_Trends_body_Picture_5.png, Be Fashionable: Trade Trends

(Created using FXCM’s Marketscope 2.0 charts)

In the chart above, notice how more pips are available to the downside than the upside. By aligning with the direction of the trend, you align your strategy to the momentum of the market.

Determine the Trend

To determine the trend, pull a price chart on a currency pair of your choice with between 100-200 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.

Be_Fashionable_Trade_Trends_body_Picture_4.png, Be Fashionable: Trade Trends

(Created using FXCM’s Marketscope 2.0 charts)

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.

Be_Fashionable_Trade_Trends_body_Picture_3.png, Be Fashionable: Trade Trends

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.

Be_Fashionable_Trade_Trends_body_Picture_2.png, Be Fashionable: Trade Trends

(Created using FXCM’s Marketscope 2.0 charts)

This downtrend changes to an uptrend when a series of higher highs and higher lows begin to form as noted below.

Be_Fashionable_Trade_Trends_body_Picture_1.png, Be Fashionable: Trade Trends

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.

Insist on finding pair in such an obvious trend that a 10 year old child can identify the trend direction from across the room. If you are not sure of the trend direction, then move to the next pair which the identification is obvious.

Take advantage of the fact that there are many pairs to trade. This is one of the advantages of trading the FX markets.

Summary

There are several advantages to trading strong trends which is 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.

---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education

To contact Jeremy, email jwagner@dailyfx.com. Follow me on Twitter at @JWagnerFXTrader.

To be added to Jeremy’s e-mail distribution list, send an email with the subject line “Distribution List” to jwagner@dailyfx.com.

If you are new to the FX market and interested in getting started trading, read these 5 articles to introduce the market to you.

What is Forex? (Part 1 of 5)

FX Transaction Basics (Part 2 of 5)

Currency Names and Symbols (Part 3 of 5)

Longs and Shorts (Part 4 of 5)

What is Leverage? (Part 5 of 5)

After reading the articles, take this short quiz as a Learning Checkpoint into getting started in Forex trading.

Getting Started in Forex - (Learning Checkpoint)

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06 July 2012 03:10 GMT