Forex trend trading is one of the forex trading strategies which is used by many forex traders of all experience levels. When a collection of data points are plotted on a chart you may start seeing the general direction in which a currency pair is headed towards. Trend trading is widely followed because of its simplicity to identify and trade; many times strong trends can bail you out of an imperfect set of buy and sell rules.
There are three types of trend: uptrends, downtrends and sideways (horizontal trends). It can be extremely difficult for new traders to finalize a trend trading strategy for trading the forex market. The good news is that most trend based strategies can be broken down into three different components: identifying the trend, planning an entry and managing an exit strategy.
The first step to trend trading is finding or identifying the trend. One of the easiest ways for identifying a trend is if price action is creating higher highs or higher lows; if price action is stair stepping upwards that means the price is making higher highs and the trend is up. Conversely if price action is stepping down toward lower lows this mean the price is potentially declining in a downtrend.
Once a trend is found traders can choose from a variety of tactics to enter into the market. One of the easiest ways to enter into the market is through the use of a breakout. Since the definition of an uptrend is the creation of higher highs and higher lows traders can plan to enter into the market when the trend continues and the currency pair breaks to a higher high.
When trading forex there is always the potential to lose money; that’s why when trading trends it is important to know that they will eventually come to an end and we should have an exit strategy. Knowing where to take profits is also an important part of any trend trading plan. Forex traders should look to avoid the biggest mistake by looking to make more in profits than what they risk in the event the trade moves against them.