They say the trend is your friend. Or, ride the trend until its end. But, what should a trend trader do to ride a Forex trend?
Everyone wants to trade trending markets. The problem is that trends do not form that often. However, there’s a catch!
Even if a currency pair ranges on the bigger time frames, on the lower ones small trends appear. As such, a Forex trend strategy gives results on lower time frames while the market consolidates on the bigger ones.
The biggest enemy to a Forex trend is the trader himself/herself. Do you know the reason why most traders fail? They can’t handle the market heat. Fear and greed take control over their decisions.
Therefore, instead of letting the profits run, retail traders settle for small wins. However, when it comes to cutting the losses quick, the reaction differs.
As a rule, traders find it extremely difficult to cut losses. But, equally difficult is to let the profits run.
A trend trading strategy must let the profits run. Moreover, Forex trends reversals must be part of such a strategy.
In Forex trading, any strategy without money management rules won’t survive the test of time. If traders start with the intention of buying the absolute low or selling the absolute high,
Forex trend signals do not differ than reversal signals. From a money management point of view, they’re the same. Furthermore, combining a Forex trend approach with reversal strategies will make the trend trader a complete trader.
The aim of this article is to show a few tips and tricks when trading a trend. The examples used here will help you understand how to ride a trend. And, how to trade its end.
What is a Trend in Forex Trading?
When the market, or the price, moves, the market trends. The longer the move takes, the stronger the trend is.
The bigger the time frame is, the stronger the implications for that currency pair and for the entire Forex dashboard. Imagine, for example, the EURUSD drops two thousand pips in a strong trend.
Because this is the most important currency pair, the implications go beyond it. Other U.S. Dollar and Euro pairs will adjust their rates.
Forex trend trading as a strategy considers the way the market moves. A trend trader will look at clues the market makes. These clues help to define the overall Forex trend.
Lower Highs and Higher Lows – A Forex Trend’s Definition
The first clue that a market forms a trend comes from a very simple sequence: lower highs or higher lows. Any Forex trend trading strategy should start from this point.
A Forex trend continues with the market moving relentlessly in the same direction. Trends may look aggressive on the hourly chart. But, on the daily, or higher, the market may simply correct.
Traders that have a trend trading system always pay attention to this higher lows/lower highs series. As long as the series holds, the trend goes.
Earlier in the article, I explained why retail traders fail to be trend followers. Many think they ride the trend. But, they’re not!
The problem comes from the time frame. People don’t have patience. Forex traders don’t have patience at all. This is normal because they deal with money.
Whenever money or a possible profit gets involved, things get messy. A trend trader’s first task is to have a different Forex trend approach to different time frames.
To this, I would add that a proper Forex trend analysis involves both patience and discipline. Regardless the time frame.
Such a simple thing like the break of a lower highs series in a bearish trend makes a difference. Until it happens, you simply ride the trend. No matter what!
Above is the EURUSD daily chart that shows the drop from 1.40 all the way to almost parity. What a trip it was!
The funny thing is that it happened in less than a year. All this time, Forex trend followers should’ve done nothing. Or, nothing but let the profits run and enjoy the run.
No spike higher took the previous swing’s highs. Hence, the trend was still alive and kicking.
If you consider the time frame (daily!), there’s a scope for tremendous profits. And the pair didn’t disappoint.
Trend Trader – The Two Points Strategy
Any trend trader must follow this rule: A Forex trendline gives the trend. In plain English, the trend line represents the line of the trend. Hence, you mustn’t ignore it.
Consider the earlier chart for a second. It shows three Forex trend lines in three different colors.
The black one is the main one. As long as the price stays below, bears should not worry.
Moreover, a trend trader knows a trend will, eventually, the end. As such, he/she will look for clues to spot the trend reversal.
The two points strategy consists of…you guessed it, two points! A trend line needs only two points.
The thing to do is to connect the two points (in this case, the two lower highs) and drag the trend line further on the right side of the chart. Trading is easy until a Forex Breakout in the main trend occurs.
Aggressive traders always look to buy the dip or sell the top. But, without a money management system, such an approach will end up failing.
The blue line in the previous EURUSD chart shows an even stronger/sharper trend. Keep in mind that we talk about the daily time frame.
The red one shows even a sharper one! Now, step back a bit from this chart and imagine you sold from 1.40.
Or, to keep it realistic, imagine you sold from the moment you saw the two points (the two lower highs) and the previous swing’s lows were broken. And you kept the position all the way until the red trend line gets pierced!
How about that for a trade! Nevertheless, if you’re honest with yourself, as a retail trader, you won’t normally trade like this.
Why not? Isn’t this a nice Forex trend system? Of course, it is. But, again, the problem comes from the execution part.
Riding a Forex Trend
One of the biggest problems a trend trader faces is related to timing. When is the best time/place to enter a trade?
The classical Forex trend following strategy says that you should buy the dip in a bullish trend. Or, sell the spike in a bearish one.
This sounds like a cool advice. But, can we have some rules? Can we, as traders, put this in some sort of trading plan? Can we have a clear entry, stop loss and take profit level, while still riding the trend?
The answer is yes. Forex trend trading strategies must follow a money management system. Without it, trading is useless.
Look for a New High/Low
A trend trader has more patience than the regular retail trader. Scalping is not his/her thing.
When riding a Forex trend, every step is a planned one. When to buy or sell? A trend trader knows in advance the answer to these questions.
Let’s go back to the two-point strategy mentioned earlier. A Forex trend line strategy starts with these two points.
After drawing a trend line, all eyes should be on the moment the price pierces it. When this happens, traders face two outcomes:
– the trend line’s break could be fake.
– the trend may reverse.
How to distinguish between the two? Moreover, how to make sure the trend still runs?
Simply look for a new high in a bullish trend. Or, a new low in a bearish one.
The USDJPY weekly chart above shows how to do that. The steeper trend line (the first red line) shows the original trend trading strategy. In a bullish Forex trend like this one, a trend trader wants to buy.
Buying takes place either from lower or higher levels. Never be afraid to buy new highs!
Buying a new high means buying strength. Traders go long when new opportunities arise.
In the case above, after the two Forex trendlines show how to do it. Wait for the price to break the first one, then look for a new high.
Buy that high, place a stop loss at the previous swing’s lows and use an appropriate risk-reward ration. For the Forex market, anything between 1:2 and 1:3 works.
However, you want to make sure you stay in the trend. Hence, book half profits at the risk-reward ratio level, and trail the rest. This way, you’ll end up riding the trend until its end.
Where to Add to a Position – A Trend Trader’s Dilemma
Every trader faces this problem. What is the best place to add to a position?
If the trend is strong enough when to buy/sell without meaningful drawdowns? One Forex trend following strategy helps.
The way to deal with this is to use an oscillator. Any oscillator will do. However, the RSI Technical Indicator works amazing!
To make sure the Forex trend following works, simply use the overbought or oversold levels to add to a position. The Forex trend in the chart below starts with the first two points that give the Forex trend line trading strategy.
The EURJPY above illustrates the strength of this strategy. By connecting the two points, you’ll have the trend line. If you project it forward on the right side of the chart, it gives the overall trend.
The RSI, in this case, acts as the best Forex trend indicator. A trend trader first looks at the trend’s direction: bullish or bearish. In this case, a bearish trend.
As such, the aim is to sell overbought levels with the oscillator, while the trend lines still hold. Oscillators represent the best Forex trend indicators in this case.
Traders will either sell when the price comes to the trend lines (in this case, three opportunities) or, even better, will wait for the RSI or the oscillator to give a sell signal too.
This is how a Forex trend scanner system works. Waiting for confirmation will always pay, in the sense that there is little or no drawdown after such a trade.
This Forex trendline strategy gives five trades to enter the trade. These five new trades have little or no drawdown.
However, the money management strategy will keep things nice and simple: place a stop loss at the previous swing’s high and go for 1:2 or 1:3.
Live Trading Example Showing How to Trade Forex Trend
Below you will find a FREE video example that shows a short trade taken as a result of a bearish trend bounce. Although the price implied a tricky breakout first, I identified the break as a fake and I held the trade for the upcoming bearish impulse.
Simply enter your details and see the Forex trend trade for free:
Different Forex Trend Trading Strategies
The biggest advantage of a trend is that you cannot miss it. That is, if you pay attention to details.
As mentioned earlier, look for a series of lower highs in a bearish trend. Or, higher lows in a bullish one.
Then simply draw a trend line connecting the lowest points (in a bullish trend) or the highest ones (in a bearish trend). The resulting line is the best Forex trend line indicator.
A trend trader doesn’t need a trend indicator “per se”. A trend trader needs clues that give him/her a competitive advantage in front of other market participants. The higher lows/lower highs series represent such clues.
Support and Resistance with a Forex Trendline Strategy
Everyone knows about support and resistance. But, few traders know that the most powerful support and resistance levels do not form horizontally.
They’re called dynamic support and resistance levels. When riding a Forex trend, they work like magic.
Riding a Forex trend is one thing. But picking up a top or a bottom after a Forex trend is another!
Yet, this is a risky approach and doesn’t represent a sound Forex trend trading system. The EURJPY chart above illustrates that.
The bearish trend worked for quite some time. After the two points gave the Forex trendline strategy, a trend trader had great opportunities to ride the trend.
However, with a proper strategy, one can pick a top or a bottom. Again, patience is key!
AFTER the price breaks the trend line, a trend trader looks at resistance turning in support. In other words, buying starts.
The RSI acts as a bellwether here. Again, the strongest signal is the one that has both the RSI and the trend line acting together like a Forex trend strength indicator.
In this case, a Forex trend trader may buy the first RSI signal after the price broke higher. If that’s the case, the stop loss should be at the previous swing’s lows.
While that trade didn’t work in a straight line, the second one did. When the RSI and the trend lines act together like a Forex trend line indicator, traders enjoy the ride.
Ichimoku as a Forex Trend Indicator
To illustrate the simplicity of a trend-following system, I’ll use the Ichimoku indicator. This one is famous for showing a balanced market: it forecasts future support and resistance levels while uses historical prices.
When riding a trend, Forex traders look at places to add to the original position. The Ichimoku helps in this regard.
Above there’s the USDCHF four-hour time frame. The Ichimoku cloud acts like the perfect Forex trend indicator.
When the cloud turns red, traders look to sell. When it turns green, it is time to buy. Isn’t trading easy?
The best trading indicator is the one that shows future price levels. Ideally, it will show both the future price and the time when the market will go there.
Using this simple Forex trend approach, simply sell when price meets the red cloud while not breaking the previous swing’s highs. Again, the money management system matters the most.
When/if the stop loss gets hit, the Forex trend reverses. But, if a trend trader uses a proper risk-reward ratio when the stop loss gets hit, the market opens a new opportunity. A new trend starts, and the same logical process begins.
There’s no best trend indicator nor a Forex trend detector system that works all the time. Because the Forex market spends most of the time in ranges, a trend trader sees many fake moves.
But discipline overcomes setups. There’s no setup that work’s all the time. However, a Forex trend strategy works all the time.
The important thing is to make sure your account survives the next day. And the next one. And so on.
Retail traders face many headwinds. Trading algorithms (robots) govern the markets today. Yet, profits can be made riding trends.
Because the Forex market ranges most of the times, a trend trader goes on the lower time frames to catch the intraday moves. But this is a risky, as the market will swing from lows/highs simply because the previous lows/highs were broken
To make sure they survive in the long run, Forex trend traders look at the bigger time frames. The bigger picture always tells the truth.
Monthly, weekly and daily charts matter the most. They filter the noise in any given trading day and keep traders on the right side of the market.
All in all, every retail trader wants to ride a trend. Few make it, though. This article explains why they fail and what to do to succeed.
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