Trend trading is one of the most effective systems to trade in the Forex market. However, a popular expression «a trend is your friend» theoretically does not cause any objections, but it is not always possible to implement in practice, especially for beginners. This trading strategy requires a certain level of knowledge and experience, especially the identification of the signals to enter the market.
What are the main aspects of the trend trading strategy?
First and the most important aspect of trend trading is the ability to identify a trend correctly and on time. It is recommended to use a comprehensive analysis of the market and a specific set of technical analysis tools (graphical analysis and data technical indicators). It won’t be enough to simply draw a trend line. A good Singapore Forex trend trader should not only be able to identify the presence of a trend in the market but also to determine its nature (long, medium or short-term trend), its phase, direction, strength and its interaction with major support/resistance levels. Also it is very important to identify trends at various time frames and see how they are related to each other.
After identification of a trend a Forex trader should focus on the signals and indicators to enter the market and open a trading position. The indicators for enter can be very different and depend on the trading system you are using. Some traders are using the trend trading strategy where a trend is always determined by the higher time frames and trading is made in shorter time periods but always in the direction of the main trend. That is, if you are trading within a day, you should look for a trend on a 1 day chart.
The main trend trading systems, signals, and the points of entry:
Trading on pullbacks of a trend. This is the most common way to trade with a trend. However, a trend following strategy does not mean that a trader should always enter the market in the direction of a trend at any randomly selected point. As we know, a trend never develops as a straight line, and is accompanied by frequent setbacks, so called corrections. Therefore, when following a trend trading strategy, the best option is to enter the market after the correction is over and the signals of a trend recovery are present. Sometimes it is very difficult to identify and distinguish the correction of a trend and its reversal.
The most effective and simple trading strategy based on the trend corrections is to buy or sell a financial instrument near the support or resistance levels. And the best option for opening a trading position is a third touch of the resistance or support level lines. This line can be a trend line drawn by a trader or moving averages lines that are individually customized for a specific time frame of your trading chart. For this purpose you can use only one moving average line or a few lines at the same time to get more additional signals for trend identification, enter and exit.
Both moving average lines and support/resistance levels work well in this strategy, so there is no much difference in the results of their usage. The only important thing is the selection of the periods of the moving averages, as they need to be selected individually for each currency pair.
When using a trend trading strategy we highly recommend to apply a variety of technical indicators (RSI, MCAD, oscillators), which allow you to see the end of the trend corrections, the beginning of a trend recovery and its movement in the original direction. Experienced traders also use Fibonacci levels, patterns, Price Action and candlestick patterns in addition to the trend trading indicators mentioned above.
After opening of a trading position you must set up a stop-loss order, that allows a trader to control potential losses. With a proper identification of a trend and its entering your trading position can be kept open for a long time. Alternatively you can fix your profits, and leave the rest of the position in the market in case if a long-term strong movement will take place.
Entering the market at the break point of the previous highest/lowest price level.
The signal of opening a trading position usually appears after the correction is over and the market breaks a level of the previous highest or lowest price. In this situation it is better to put a pending order with a stop-loss at a certain level according to your risk management system.
In addition to the basic rules of the Forex trend trading strategy we also recommended to use the tools of technical analysis such as moving averages and various technical indicators that give a trader important information about the strength and direction of a trend.
Trend trading based on the certain graphic patterns
Trends in the Forex market are very dynamic as they periodically lose their strength and then continue their movements with a new impulse of power. Thus a single trend may have a few corrections or pullbacks where a trend is in a situation of consolidation of the market and this is the time where you can find a variety of trend continuation patterns. These patterns are flags, rectangles, wedges, triangles, etc.
Each of these trend continuation patterns are very specific by the way they were formed and by the rules of opening a trading position. Therefore, novice traders need to carefully examine these figures before starting applying them in their trend trading strategies.
A Forex trader can successfully trade this strategy using a variety of trend trading indicators and signals to reduce the risk of losses. The best way to trade this strategy successfully is to develop your own trend trading strategy based on the common trading rules and tune it up for a specific time frame and financial instrument.
Also it is very important to notice that there might be few trends at a time in the market but in different time frames and a Forex trader must decide which of them he or she follows. In order to become a successful trader you must learn to keep a strict discipline and be able to wait for a favorable situation and find clear and confirmed signals to open a trade.