“The trend is your friend” is one of the most common trading phrases. This simple and widely used expression depicts the importance of trends in a trading plan. In this article we will learn to identify trends with the help of price charts and forex technical analysis and some common indicators.
“Trend Trading” is a popular strategy in itself which is used by experienced traders as well as beginners. It makes your trades easy and profitable by identifying the trend direction. A strong trend can tell you which path to take in your trade and how to benefit from it. Since no trading strategy can be absolutely perfect, trend trading is used to minimize those imperfections with the help of strong trends.
Trend trading is much simpler. For example, if there is a strong trend indication of market moving upwards, all you have to do is buy. This does not mean that all your trades will be a success, but it ensures that once you find a strong trend, you do not have to worry about entry and exit.
When trading in the direction of trend, you align with the market momentum and all your strategies easily fall into place. More pips should be made in the direction of trend than against it.
To trade with the help of trends, first you have to learn to identify those trends.
Pull a price chart between 100-200 candles on a currency pair of your choice. A series of higher highs and higher lows on the price chart will indicate a condition of upward moving trend. Now as the upward trend ends, a series of lower lows and lower high will be established indicating that the trend is now moving downward. There are no absolute rules for identifying highs and lows, only the most obvious up trends and downtrends should be used. Because the idea is to be able to identify the trend direction with ease, one must choose the currency pairs which show most obvious movement of prices. If you are not sure about the trend direction in a certain pair, move to the next one since this forex market and you always have a lot of different currency-pair options to trade with.
Some of the most commonly used technical indicators in trend trading are Moving Averages, Moving Average Convergence Divergence, Relative Strength Index and On Balance Volume. MA gives the average price over a time period in the form of a smooth data flowing in a simple line. The MACD is an oscillating trend following and momentum indicator. RSI is also an oscillator which interprets price information as ‘overbought’ and ‘oversold’ and OBV compiles volume information into a single one-line indicator. All these indicators can be used on all time frames and have adjustable variables.
There are many advantages to trend trading due to which experts refer it. The key is to go for the most obvious and strongest trends and trade in the direction of trends. Moreover, technical indicators provide trade signals and reversal warnings so they must be paid attention to. There are many more uses to indicators than mentioned in this article and traders must learn to apply them based on their trading strategies.