Trend Trading - Forex News by FX Leaders

Trend Trading

Posted Monday, March 21, 2016 by
Skerdian Meta • 4 min read
Trading along 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 strategies as one of their main 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. This means that when trading we should be flexible and react to the actions of the market.

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 questions 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 use trend following strategies. By doing 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. This means that 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. To do 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, that show that there is strong buying pressure around 1.48-49 level. In addition, there is divergence on all three indicators, MACD, Stochastics and RSI. So that is a confirmation that a new trend is forming.


Don’t know what pin candles are? Click Here to learn


Is the risk/reward ratio worth taking?

To get a better risk reward in

trend trading strategies 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 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 trend following strategies:

  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. 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.  ??Learn more about using multiple time frames

  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. Due to the amount of positions on 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

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About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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