How To Trade Using Forex Trends?
One of the most influential and straightforward strategies that you can follow for forex trading is going with the trend. It is also one of the safest trading techniques, as you move with the market and not against it. Trend trading has become popular among forex traders due to its high profit potential and low risk. However, some technicalities are associated with forex trends, and having some knowledge about them gives you an edge while engaging in trend-based trading. In this article, you will learn valuable information to trade using forex trends and tips to make the market move in your favour.
Meaning of Forex Trend
The trend can be defined as the direction in which the market is headed for a particular currency pair. In the currency market, you will be trading with international currency pairs to make profits by predicting the possible fluctuations in their exchange rates. The prediction should be made in a logical manner by analysing the market on a technical level by keeping track of currency price fluctuations. This is what we refer to as technical analysis. When you learn about technical analysis, recognising price patterns and interpreting them as trends would be one of your first lessons.
In simple words, a trend is identified when the price of an asset or instrument moves in the same direction for a period of time. The duration for which the price keeps moving in a particular direction determines whether it is a long-term or short-term trend. The direction of the market can be up or down, or it can keep moving horizontally without any drastic jump or fall in prices. This direction needs to be identified for spotting the ideal trend trading opportunities based on the nature of the trend.
Basically, 3 types of trends can take place in a financial market: uptrend, downtrend, and horizontal. An uptrend is also called a bullish trend, where prices increase, showcasing an upward movement in the price charts. The opposite case scenario, where prices start falling, is known as a downtrend or bearish trend, which can be identified from the charts depicting a downward pattern.
But the forex market will not be going up or down all the time, and it can also get stuck in a fixed range, resulting in a sideway trend or horizontal trend without a significant rise or drop in prices but frequent price fluctuations happening in both directions back and forth. This type of trend is also referred to as ranging, a sign of choppiness in the market. This type of market suits only scalpers because they aim for small price movements. They use a pip calculator to find out the number of pips they captured in the whole trading day to get a clear idea of their total profit or loss.
How Do You Identify a Trend Break?
Before talking about identifying trend breaks, we need to understand how we can identify the starting of a trend or an ongoing trend. The primary tool for recognising trends is the price chart we use for analysis. You can use some technical indicators to get more clarity about the trend, and adding some reliable indicators is helpful for assessing the strength of the trend and the overall market sentiment. However, the information provided by price charts must be prioritised while making trading decisions. Along with that, you should be placing trades after proper calculations to minimise mistakes. For example, you can use a profit calculator to quickly find out the profits you can make by trading a specific currency pair with a certain lot size. You will get the profit details in your base currency.
When it comes to trend break, it marks the end of a trend for the time being, which means that the market has stopped moving in the direction of the previous trend. The price has broken the pattern formed earlier, and this pattern was our proof of the ongoing trend. When the price starts breaking the pattern and heads in a new direction, it can be interpreted as the end of the current trend.
One easy method to recognise the end of an uptrend is checking if the price is dropping below the lowest level recently reached. In case of a downtrend, you can identify a trend break when the prices start rising and surpass the recent high level. This may not always result in the end of the trend, as it can be a temporary pullback or retracement, which can happen frequently. The trend will resume once the pullback is over, and this type of corrective movement is a common occurrence in the forex market.
When the prices keep moving in the same direction, confirming the trend, it is an impulsive move. In the case of candlestick charts, you can quickly identify impulsive moves if you see the same colour, longer candles with shorter wicks. In case of corrective moves, the candles will be mixed with both colours, and they tend to be shorter with longer wicks. One thing to note here is that the corrective moves can also be horizontal without resulting in a reversal by moving in the opposite direction of the trend.
The Usage of Trendlines
One of the most effective techniques for trend trading is drawing the trendlines on your price chart, as it gives a clearer picture of the market situation. Basically, trendlines can be a great tool to navigate the market when it is trending. Now, the usage of trendlines will depend upon the information you want from it. When you are looking for the perfect entry point after spotting an ongoing trend, you can place the trade after the price reaches the trendline. This will be an appropriate price level for opening a position to profit from the current trend.
But when you have already opened a position, looking for the best exit point in the middle of a trend, you need to pay attention to the point when the price breaks the trendline, which would be your profit target to make the most out of the trend. Trendlines can also be used for placing and adjusting your stop loss. Your stop loss does not have to be rigid, and moving it based on market direction allows you to maximise your profit potential or minimise the risk based on the situation.
Can You Trade Without a Trendline?
Many traders tend to think that they cannot trade without a trendline in the chart, and they even go to the extent of forcefully drawing a trendline. You don’t need to do that for trend trading, and drawing a trendline should be natural; it doesn’t need to be done when you don’t see the line while connecting the highs and lows of the price movements. Sometimes, the space between the highs and lows will not be even, and trying to draw a trendline with such uneven points will not make any sense. You can still follow the trend and place trades in that direction, and not having a trendline does not make any difference to the market situation.
Channel Line and Trendline
The channel line helps get a more detailed view of the trend as it allows you to see the price fluctuations within the trend. For this, you just need to draw a channel line beside the main trendline in a way that they are parallel. One thing to remember about the channel line is that it is less rigid, and you will see the prices breaking it many times compared to the trend line. So, the channel line is only playing a supportive role here, and the key role will be taken by the main trendline only. You don’t need to pay too much attention to the channel line, but it can give you some guidance to enter trades at the best prices.
Determining the Time Span of Trends
Another question that often confuses traders is the time span of a long-term trend. Long-term trends can go on for an extended period of time, but how long they last will be determined by a number of factors which are beyond the technicals. The market fundamentals have the most influence over the length or duration of a trend, and major pairs like EUR/USD can be a good example to study trends that last for several years or decades.
But as a trader, you don’t need to go that deep; staying focused on your own timeframe would be better. Scalpers, day traders, swing traders and positional traders will all be considering different time frames for analysis, and hence, the duration of a trend, being long or short, will depend on your trading style, too.
Final Thoughts
To sum it up, the volatile forex market is an apt place to follow trend-based strategies. Anyone with the right set of tools and analytical skills can easily spot a trend and turn it into a trading opportunity. Being a forex trader, you will also be witnessing a lot of trend breaks and trend reversals in the process and choosing the best course of action makes you profitable in trading.
