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3 Steps to a Forex Trend Trade

3 Steps to a Forex Trend Trade

2013-12-06 04:00:00
Walker England, Forex Trading Instructor
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Talking Points

  • A trend trading plan can be created in 3 simple steps
  • Traders can find a trend and then look to trade a price breakout
  • Managing market exits can be done using previously identified highs and lows

It can be extremely difficult for new traders to finalize a trend trading strategy for trading the Forex market. However, the good news is that most trend based strategies can be broken down into three different components. Today we are going to review the basics of a trending market strategy by identifying the trend, planning an entry, and identifying an exit.

So let’s get started!

Find the Trend

The first step to trend trading is to find the trend! There are many ways to identify the GBPUSD trend pictured below, but one of easiest is through identifying if price is creating higher highs or higher low. If price is stair stepping upwards that means price is making higher highs, and the trend is up. Conversely if price is stepping down toward lower lows this mean price is potentially declining in a downtrend.

Given the information above, traders should look for opportunities to buy the GBPUSD in its current uptrend. Pictured below we can see the chart graphically creating higher highs. If the trend continues, expectations are that price will remain support and new highs will continue to be created.

Learn Forex –GBPUSD 4Hour Trend

forex trade trend charts currencies

Plan an Entry

Once a trend is found, traders can choose from a variety of tactics to enter into the market. One of the easiest ways to enter into the market is through the use of a breakout. Since the definition of an uptrend is the creation of higher highs and higher lows, traders can plan to enter into the market when the trend continues and the GBPUSD breaks to a higher high.

Below you can see an entry to buy the GBPUSD with the trend. Traders using this methodology can set an entry above this value and in the event price breaks above this value they will be entered into the market. There are two benefits of using an entry order. First you don’t have to be in front of your computer to be entered into a position. As long as you have an entry and the price you have selected is available for trading, your order will be triggered. Secondly, in the event price never breaks above the previous high this order can also be deleted. Now that we have an entry planned let’s look at completing our trading idea.

Learn Forex – GBPUSD Breakout Strategy

forex trend trade stops limits profit loss

Manage Exits

When trading markets, there is always the potential to lose money. That’s why when trading trends, it is important to know that they will eventually come to an end. In an uptrend like the GBPUSD, traders may place stops under the previously identified swing low (higher low). In the event that price breaks under this value, it may symbolize that at least temporarily the GBPUSD trend may be ending. Traders can exit any positions at this point through the use of a Stop Order.

Knowing where to take profit is also an important part of any trend trading plan. Traders should look to avoid the “Traders Number One Mistake” by looking to make more in profits than what they risk in the event the trade moves against them. DailyFX has analysed millions of trades and have developed a comprehensive guide on the attributes of succesful traders in our "Traits of Successful Traders Guide" which is a must read for all traders. Using the example above, if a 150 pip stop loss has been set under the swing low, traders will expect more in return in the event that they are right. If a 300 pip limit has been set, this would create an expectation of a 1:2 Risk/Reward ratio.

Frequently Asked Questions (FAQs)

Do you have any other resources for new traders?

Get to know the basics of forex trading through our New to FX guide. You will learn what forex is and how to trade it making use of leverage. Furthermore, this essential guide provides an understanding of commonly used forex jargon and how to read a basic forex quote. After reading the guide new traders should be well on ther way to developing their own forex trading strategy. Our in house trading specialists present a number of webinars throughout the week. Take a look at our topcs via the webinar calendar.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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