The trend trading strategy is one that has been used for several years among the trading community. There are several financial instruments in which a trader may use to turn a profit through this strategy, and forex is no exception. In fact, the trend trading strategy is one of the most used strategies in the forex market. Today, we’ll talk about what the trend trading strategy is, how forex trends are different from other market trends, and provide a few tips for trend trading in the forex market.
What Is The Trend Trading Strategy?
As mentioned above, the trend trading strategy is a commonly used trading strategy among various different types of traders. The strategy is a technical one and the concept is relatively simple. You see, the trend trading strategy is the process of identifying trends, and based on the trend seen in the chart, capitalize on the movement by making a profitable trade.
One of the primary benefits of the trend trading strategy is that it takes human emotion out of the trading process. After all, emotions can lead to losses. Instead, when using the trend trading strategy, the charts provide signals that tell you what to do, and the charts don’t care whether or not you won your last trade.
How To Identify A Forex Trend
For the trend trading strategy to work for you, it’s important that you learn how to identify a trend. Believe it or not, the process is a very simple one. In the chart below, the USD/EUR is depicted. The outlined areas in the chart are a clear depiction of an uptrend in the forex market.
Essentially, identifying a trend is as simple as looking at the peaks and valleys on a chart. When the peaks, or highs, continue to climb higher and higher, the valleys, or lows, follow suit. When the tend is a downward one, we see the exact opposite. In a downward trend, the valleys fall lower and lower and the peaks follow the trend downward.
Tips For Trend Trading In The Forex Market
At the end of the day, forex trading is a very volatile process. However, there are a few tips to help reduce the risk when trend trading in the forex market. Those include…
- Always Trade In The Direction Of The Trend – As mentioned above, trend trading takes the emotion out of the equation. If you’re trading an uptrend, make sure that you only trade in the upward direction. On the other hand, if you’re trading a downtrend, only trade in the downward direction. While there may be a signal to trade in the opposite direction, these signals are generally breaks in the trend and should not be mistaken as a reason to change the direction of your trades.
- Short Term Trends Are Dangerous – In the forex market, volatility is high. Therefore, it adds to the risk of trading short term trends. Ultimately, trends that last a few minutes are no sign of a long term signal. Make sure that your trend is well-defined before trading based on it.
- Trends Aren’t Perfect – At the end of the day, trend trading isn’t a perfect strategy. In my many years in the financial industry, I haven’t found a perfect strategy. So, there is always going to be risk. Never trade any more than you can afford to lose.
The trend trading strategy is a popular one for a good reason. At the end of the day, it works. While it’s not perfect, it’s about as close as you get in the market. By learning how to define trends and following the tips above, you too can use this strategy to turn a profit in the forex market.