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Why trend is your friend in forex trading?
Written by: PaxForex analytics dept - Thursday, 31 December 2015 0 comments
As a trader, you have probably heard the old adage that it is best to trade with the trend. The trend, say all the pundits, is your friend. This is sage advice as long as you know and can accept that the trend can end. A popular trading expression is "the trend is your friend". This expression has stood the test of time because many traders find it as a critical building block of a trading plan. So the important question is, how can we determine the direction of the trend?
In its most basic sense, a trend is simply a prolonged market movement in one general direction, either up or down. From a trader's perspective, though, that simple definition is so broad as to be almost meaningless. For our purposes, a trend should be defined as a predictable price response at levels of support/resistance that change over time. For example, in an uptrend the defining feature is that prices rebound when they near support levels, ultimately establishing new highs. In a downtrend, the opposite is true.
Trend analysis is based on the idea that what happened in the past gives traders an idea of what will happen in the future. Although this this may seem pretty basic, being able to identify when a currency pair is in a trend and when it isn’t will help you to
increase your chances to profit consistently in the forex trading. When you can identify a trend, you can estimate what direction the rate of a currency pair is going to go. You should exploit the direction of the trend you identify by placing a trade in that direction.
A trend is not actually a strategy by itself; it’s just an added point of confluence that increases the probability of a trade. However, just randomly jumping in with a trending market is not an edge or a strategy. As a market moves higher or lower, its previous turning points, or swing points as I like to call them, become reference points that we can use to help us determine the trend of a market. The most basic way to identify a trend is to check and see if a market is making a pattern of higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend.
Take advantage of trends when they happen – There is never anything concrete with trends…meaning you never know how long they will last for, so try to take advantage of them when they do occur. Markets typically only trend about 25 to 35% of the time, and the rest of the time they are range-bound or chopping in a sideways fashion. The trick is to learn how to identify a trending market so that you can get the most out of it and get on board as early as possible.