Forex Trend Trading Explained
The largest and most liquid market in the world, forex offers a huge variety of opportunities for all traders, whether you're a beginner or a trading professional.
To successfully open and close positions, you'll need a robust trading strategy, with many traders choosing trend trading to navigate the financial markets. Read on to find out about forex trend trading strategies and how to use technical indicators and chart patterns to get the most out of your trades.
- What is trend trading in forex?
- Forex trend trading strategies
- Technical indicators
- Moving average
- Average directional index
- Donchian channels
- Chart patterns
- Ascending and descending triangles
- Head and shoulders
- Engulfing pattern
- Fibonacci
- What is the best forex trend trading strategy?
- Apply forex trend trading strategies with Tradu
What is trend trading in forex?
Like in any market, trend trading in forex involves analysing past price movements of a security (in this case, currency) to predict future values, based on upwards or downwards trajectories. Market momentum is a huge factor in trend trading as this helps to signal the best entry and exit points of a trade. Technical indicators and analysis are used to spot patterns that suggest market momentum.
It's also crucial to be aware of the factors that can affect forex and aspects that can create new trends in currency pair values.
You can find out more about trend trading in our detailed guide.
Forex trend trading strategies
Forex trend trading strategies are helpful for identifying trends at the right time, meaning that positions can be opened and closed effectively to maximise potential profits. A major aspect of trend trading is to spot new highs or new lows and to execute trades to capitalise on these movements.
Forex trading requires effective trend strategies that can be applied to trades featuring a variety of currency pairs. To apply trend strategies successfully, you'll need to rely on technical indicators that provide specific data. You can then use this data to make informed trading decisions such as when to enter and exit a trade and the level of risk management that you're likely to need.
The following are some common approaches to using trend trading forex strategies.
Technical indicators
These are some popular methods that can be used to identify trends in the forex market:
Moving average
One of the most common approaches when trend trading forex, moving averages can give a clear indication of market movement. It's crucial for forex traders to identify market direction and, even though this method focuses on past movements rather than predicting future movements, it's a useful tool for analysing changes.
It's also easy to use this method across any time frame so that you can get a snapshot of an average market value over your chosen time period.
Simple moving average indicators give average value across your chosen timeline. One line on a chart shows the moving average, which is calculated by adding together currency closing prices and dividing this number by the number of days.
Exponential moving averages (EMAs) act in a similar way but consider recent price movements above past movements. EMAs can be helpful when including fundamental influences in your forex trend trading strategies.
Donchian channels
These are technical indicators that are a good way of spotting trends that are about to start, through breakouts. You can then use these to decide when to buy or sell a particular currency pair.
Again, you can track any specific time period and chart the parameters to identify whether the value rises above a previous high or falls below a previous low. Three bands are plotted on a graph to give an indication of market momentum.
Average directional index
Another important factor when using forex trend trading strategies is the strength of a given trend. This can be useful to know and can help to decipher whether a market is simply ranging or at the start of a new trend.
ADX highlights only the strength of the current trend, not the direction. It's stated as a figure between one and 100, whereby anything over 50 means a strong trend and can either be bullish or bearish.
This can be especially helpful when trading currency pairs via financial derivatives such as CFDs as it can signal strong entry points, regardless of market direction.
Chart patterns
These are often used alongside technical indicators as part of an overall forex trading trend strategy.
Ascending and descending triangles
These suggest trend continuation, an important factor to consider when entering or exiting positions in the forex market.
A triangular pattern is formed when a price range becomes tighter. When the triangle is complete, either ascending or descending, the trend generally continues along the previous trend trajectory.
These are particularly useful in forex trend trading strategies when market momentum could go in either direction and the bull and bear are at loggerheads.
Head and shoulders
This chart pattern usually signifies a trend reversal, with its name derived from the shape that it represents on the graph. It comprises of a peak, a higher peak and a further lower peak. A line can then be drawn to connect the two lowest points. This can also be inversed, which signifies a new uptrend.
In other words, the pattern is complete when the line which connects the lowest or highest points is broken.
Engulfing Pattern
A pattern consisting of two candlesticks, one significantly larger than the other; this represents either a bearish or bullish trend reversal. It's seen at the end of significant upward or downward price moves.
However, when using this forex trend trading strategy, it's important to distinguish changes in trend from pullbacks. It's also fairly unreliable when a currency pair is simply ranging, rather than following a trend, so it doesn’t tend to suit markets with many fluctuations.
Fibonacci sequence
Fibonacci retracement levels are used when the market is trending. Horizontal lines show support and resistance levels which signal ideal entry points, depending on the market direction.
While many forex trend trading strategies identify only past price movements, this approach aims to predict future movements. This is based on the premise that the price will retrace before continuing the trend direction.
As with other strategies, identifying this pattern involves finding the recent highs and lows and plotting them for the currency pair that you're trading, using Fibonacci ratio calculations.
What is the best forex trend trading strategy?
Trend trading strategies should ideally be used in combination with other strategies to get the most out of a trade. For this reason, there isn't one forex trend trading strategy that stands out above all others. It's a matter of preference and how much time you have to dedicate to analysing indicators and patterns.
If you’re new to forex trading, it's a good idea to begin with one or two forex trading trend strategies and use them alongside another approach to give a better overall market view. It's also important to implement suitable risk management such as stop-loss orders to prevent greater losses.
Thoroughly research your chosen strategy before applying it to trades and take note of what did and did not work once you've closed your position.
Apply forex trend trading strategies with Tradu
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With Tradu you can trade crypto via CFDs.
Forex trading guide
How to trade forex
Currency pairs guide
What drives forex prices?