Novice traders may often hear from more experienced Singapore Forex traders that trading with a trend is the best way to start trading in Forex. This advice has some sense and is proven by many years of trading experience. The main goal of a trend trader is to correctly identify the direction of a trend, as the price chart of the financial markets never consists of long straight lines. If you master the skill to distinguish trends and will learn to apply it in your everyday trading, you’ll never be at a loss.
What is a trend and how it appears.
The main driving force of the financial market that creates a powerful long-term trends is major participans of the market – a variety of investment and pension funds, public and private banks, big investors. They supply the market with huge volumes of funds. Therefore the smaller market participants, including individual traders are left to do anything else but to follow the directions of the market, being unable to influence the market with their small investments. Thus, the reasonable behavior of a trader in the Forex market is to follow the trend established by major players. Only in this case we have chances to have a profitable trading.
One of the main obstacles of mastering a trend trading strategy can be a belief that it is almost impossible to predict the trading decisions of the main players, as there is no information about when and for how long they are buying or selling. However, as we know, history repeats itself, and it can help us in the proper identification and analysis of trends.
Thus, the main task of a trend following strategy is to determine the starting point of the trend formation. It is clear that the earlier we identify a trend movement, whether up or down, the greater will be the effect on the chosen strategy and our profits. An additional task is to identify the limits of the price range in which the price movement may very within the generated trend.
To identify a trend, you need to properly draw two lines on the graph of price movement – a line of support and a line of resistance. One of the main targets of technical analysis is a correct identification and drawing of these lines. Note that the support and resistance lines, beside a technical function, at the same time serve as psychological levels. Many experienced traders who usually don’t use technical analysis, sometimes trade exclusively using the trend lines.
The support line is constructed in such a way that it goes through important lows of the market price. If you open a graph, it is easy to see the points at which the price goes down until it stopped and bounced upward. Through these points you must draw a line of support. For your convenience, you can make it colorful, let’s say green. The price’s rebound from the support line is much more probable than its breakdown. Also, remember this rule – in the case of breakdown of the support line and the current price level stays below it, this line turns into a resistance line at the subsequent market movements. Now the price of its movement will be repelled down from the line.
Resistance line, on the other hand, passes through major peaks (peaks on the chart). Similarly to support lines, a resistance line is drawn on the highest price points at which there was a sharp reversal of the price downward. Accordingly, bounce down from the resistance line is more likely than the movement upward. In addition, the same rule also works for a resistance line – in case of the resistance line breakdown, it is transformed into a support line.
Most of the trend trading Forex strategies are based on the technical analysis, therefore the correct identification and the exact construction of the lines of support and resistance levels gives a trader the following advantages:
– Correct identification of a trend and its direction.
– A good analysis and determination of a trading strategy, including the points of enter and exit of a trend. Also it is much easier for a trader to decide what levels of take-profit and stop-loss should be selected for each transaction;
– Instantly spot any change in the trend direction and its development.
Typically, the breakdown of support and resistance lines signals about a reversal of the market and a trend’s change. Often a trend’s change occurs gradually, the price can move in the old price range for a while, and only then start a new direction.
Quite often, support and resistance lines are located in parallel to each other, in this case we say that the price moves in the channel. This situation is very convenient for a trader who analyzes a market with a help of a technical analysis, as this method gives a clearly visible point for opening and closing positions.
Statistics show that once a price breaks the channel lines, it usually makes a leap from six to eight-tenths of its width. If you open a trading position at a right time, you can make a good profit.
Analysing different trend following strategies, we have selected a list of the 5 main rules for a successful Forex trend trading:
1. Before entering the market you must carefully check all data, namely make sure to test your trading system. Every strategy or system that you are going to apply, must be tested on the historical data of the market by scrolling through the price graphs back. Only a tested trading strategy can be used with the real money on your real trading account.
2. Do not waste your time on minor things. Focus on achieving the main goal, as it will allow you to become a professional Forex trader. In order to earn stable income and be profitable in the Forex market you should be choose and trade a particular currency pair, use a particular trading system and trade in one particular time frame. The combination of all three factors and adherence to the chosen course over time will make you an expert in Forex trading. Finally you will become one hundred percent confident in your ability to trade profitably, without significant drawdown account.
3. It is very important to understand that you may find different trends in the different time frames. Make sure you are not confused here and keep on trading using only one time frame. As the same currency pair can have a downward trend on a five minute graph and at the same time an upward trend on a 4 hour graph.
The time frame you are using for trading may depend on your life style, habbits, etc. For example if you have a regular job and trading Forex only on your free time, it is better to use a 1 day time frame. Thus you will be able to check the graphs once a day after work. Longer time frame bring higher earnings and at the same time require higher deposits.
4. The trend trading strategy requires your patience and precision. You should wait patiently for a strong price movement of a trend, while not being distracted by anything else. If you try to enter the market using a different trading strategy, you are risking to miss a trend and potential earnings. You can not sit on two chairs at the same time. Be focused, stick to one trading strategy and follow it no matter what.
Note, that in order to minimize your risks you can trade a small number of lots with smaller amount. Once you feel more confident with your strategy, you can increase the lots and amounts.
5. Last, do not listen to anybody – just yourself! All kinds of analysts, commentators, advisors continuously generate forecasts and sometimes they are contradictory or misleading. It is a good thing to be updated with such data, but make sure that you don’t change your trading strategy because of it. Stay on the right path and follow the rules of your trading strategy. And simply, the responsibility for your trading account is on you, not on somebody else. Therefore, you should answer most of the questions asked by the market!