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How to Profit from Currency Trends in Forex
Written by: PaxForex analytics dept - Friday, 08 February 2019 0 comments
Success with forex market investments is tied to the investor's ability to identify trends and position themselves for profitable entry and exit points. Forex trend is an integral concept of technical analysis that provides information about the general direction of the market. A trend can either be long-term or short term, depending upon economic, sentimental and other fundamental influences. It may not always be possible to identify the absolute beginning or end of a trend. However, traders can seek to get into a trade at least early enough to take a position ahead of the middle of the trend and ride it upward or downward towards its completion.
Trends come in many different shapes and sizes. Some are channels with parallel upper and lower trend-lines, while others have only a single trend-line. This is an important distinction as a trend with only one trend-line will have a line acting as support in an uptrend and a line acting as resistance in a downtrend. We should keep in mind that due to the human nature of the market, trends don’t always follow a perfectly symmetrical trend line. When trading, we should be flexible and react to the actions of the market. Although the market may spend 70 or 80 percent of the time in ranges, still those 20 percent of the time in which the market is trending offer the best and most profitable trading opportunities.
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 of 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.
The price of a currency pair will fluctuate throughout the course of a day and will create a high price and a low price. When the high price of a currency pair is above the high on the previous day, it creates a "higher high." When the price of a currency pair is lower than the previous day's low, it creates a "lower low." Higher highs of a currency pair combined with higher lows of a currency pair also demonstrate a forex trend. For example, if a currency pair makes three consecutive higher highs along with three consecutive higher lows, an uptrend is in place, while three consecutive lower lows along with three consecutive lower highs indicate a downtrend.
Knowing when a trend has changed is one of the main problems traders face in the markets. There are many different methods people use to try and work out when the trend has changed, some use fundamentals, others use indicators, the concept of analyzing the swing highs and lows being made in the market is one of the oldest technical trend identification methods around. Just because this method is very old (analyzing swing lows and highs have been in use for at least 100 years) does not mean it is no longer effective.