There are numerous strategies you can employ when trading forex; one of which is trend trading.
The foreign exchange market has continued to grow with the emergence of more online brokerage firms. It expands along with the advancement of technology and has begun offering more currency pairs to traders who wish to expand their horizons. Therefore, it’s no longer much of a surprise that more strategies to try and make the best out of it have emerged as well.
Learn more about one of the most popular trading strategies used in the largest market across the globe: Trend Trading.
What is Trend Trading
Trend trading is a long term strategy used in forex trading. It analyzes an asset’s movement in a particular direction, either upward or downward, in an attempt to gain profits. As a trader, you can establish positions that are likely to see larger price movements over the long term while avoiding any losses that may occur from price “breakouts” during a certain range.
This kind of strategy doesn’t really require for you to have pro-level experience. All traders, no matter the amount of experience can choose to learn and use trend trading. It has been one of the most popular styles of trading since traders tend to latch on to existing trends. It was first popularized among retail traders back in the 1980s.
The strategy uses technical analysis extensively, using both chart patterns and technical indicators. Trend traders aim to isolate and extract profit from trends. There are multiple ways for a trend trader to succeed in its goal.
Learn more about what you can do to recover from a trading loss.
Trend Trading Indicators
Keep in mind that there is no single indicator that can assure you of success in trading since it also involves factors like risk management and trading psychology. But there are certain indicators that have stood the test of time and remain to be favored among trend traders. We’ll now be giving you four of the most popular trend trading indicators.
MACD or Moving Average Convergence Divergence
The MACD is a type of oscillating indicator, meaning it fluctuates above and below zero. This can be used as both a trend-following and momentum indicator.
You can predict the trend with the MACD strategy by observing at which side of zero the MACD lines lay. If the lines are above zero for a sustained period of time, you can conclude that the trend is likely up. Potential buy signals might ensue during these times. Conversely, if the line is below zero for a sustained period of time, then the trend is likely down. Potential sell signals might ensue when the lines crosses zero.
An MACD has two lines, which are the fast line and the slow line. When a signal line crossovers, additional buy and sell signals may occur. A buy signal takes place when the fast line crosses through and below the slow line, and vice versa.
The MACD’s potential can be boosted when used along with other indicators.
When using moving averages, it creates a single flowing line to try and “smooth” price data. The line will be able to tell you the average price of an asset over a certain period of time. You can choose from different moving averages for different time frame in which you trade. As a long term trend follower, you can use the 200-day, 100-day and 50-day simple moving averages.
You can use the moving average in various ways. First is by looking at the angle of the moving average. If you see that it mostly moves in a constant horizontal direction for an extended amount of time. With this observation, you can conclude that the price isn’t trending, and instead is ranging. But if the direction is shown going upwards, then an uptrend is taking place.
Another way to use the moving averages is by crossovers. You can plot a 200-day and 50-day moving average on your chart which will result to a buy signal occurring when the 50-day crosses above the 200-day. On the other hand, a sell signal will occur when the 50-day drops below the 200-day. You can make changes to the time frames so that it will meet your individual trading time frame.
It’s important to note that moving averages are not able to provide predictions. They merely show what the price is doing on average over a certain period of time.
OBV or On-Balance Volume
The OBV is a momentum indicator that gathers lots of volume information and compiles it into a signal one-line indicator. It them measures the cumulative buying/selling pressure through adding the volume on up days and subtracting volume during the down days.
Generally speaking, trends can usually be confirmed by the volume accompanying it. An OBV should rise alongside a rising price, while a falling price should be accompanied by a falling OBV.
If an OBV begins to rise but the price does not, chances are the price will soon follow and match the rising OBV. Meanwhile, if a price is rising but the OBV remains flat-line or begins to fall, this indicates that the price may be nearing a top. If the price falling and the OBV is flat-lining or rising, the price might be nearing a bottom.
RSI or Releative Strength Index
The RSI is another type of oscillator. It provides different information than the MACD since its movement is contained between zero and 100.
One way to read the RSI is by classifying the prices as overbought or oversold. The price is classified under overbought when the indicator is above 70. This can then be interpreted as a price due for a correction in the future or soon. Meanwhile, having the indicator is below 30, the price is considered oversold. You can interpret this as the price being due for a bounce soon or in the future. Generally, overbought and oversold levels can be occasionally accurate but might not provide the timeliest signals for trend traders.
Tips for Trend Trading
Watch the Current Events
It can prove to be helpful for you to keep watch of the current events happening in the real world. Staying updated will not only benefit you in trend trading, but also as a trader. There are various real-world factors that can affect long term trends for certain currencies and assets.
To try and stay ahead as much as possible, there are certain news categories that you should follow to see what might be influencing the indicators. Some of the categories are: interest rate policies; inflation; national trade and investment balances; national production factors; and government policies. Just remember to check the charts yourself and not only base everything on what you hear.
Learn to Identify a Trend
When using technical charts, you can easily identify the trends by a succession of higher or lower trading ranges. Remember that an uptrend is read as a market made up of a series of higher highs and higher lows. A downtrend on the other hand is read as a market made up of a series of lower highs and lower lows. Such trends may occur within a matter of days, weeks, or month, depending on the underlying conditions of the market.
Keep in mind that it might not be entirely possible to accurately identify the beginning or end of a trade. Despite this, you can still open a trade early enough to take a position ahead of the middle of the trend. You can then ride the wave upward or downward towards its completion.
Determining the Top or Bottom
It might prove to be a difficult task to determine the absolute top or bottom of a trend. Those who have used trend trading for some time have learned to accept some small losses and assure gains than to try and always target the maximum profit by exiting a trade at its peak. Regardless, it’s important for traders to, at the very least, have an idea when a trend might be reversing. One of the most common technique for determining such include what traders refer to as the chart trend lines’ “double tops,” or “double bottoms.”
When either of these takes place, traders usually take it as a signal that a trend reversal might soon take place. They can usually be identified when a chart trend line reaches a short-term high or low point and then fails to move past the resistance or support level during a subsequent second movement in the same direction.
The forex market the largest, most liquid market in the financial industry. More and more strategies have begun to emerge, trying to make the most out of every opportunity. But trend trading has gained popularity for a reason. It has proven itself to be useful in identifying the best ways to gain profits and avoid losses as much as you can. Just remember to keep honing your skills; learn both from experience and the people around you.
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