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Understand trends in Forex Trading

Aug 24 • Forex Trading Articles • 1743 Views • Comments Off on Understand trends in Forex Trading

Most of us will know the phrase by now; “the trend is you friend, until it bends at the end.” We’re constantly encouraged, via: forums, articles, ebooks and our trading contacts, to identify the trend in the market place and to act upon it; “don’t trade against the trend, try to avoid taking trades near to the end of the trend, try to determine when the trend is ending and manage your trades and stops accordingly. Use (such and such) technical indicator, to illustrate when the trend is about to end…”

There’s absolutely nothing wrong (in theory) with any of these and the many more statements which relate to market trends, however, what is a trend, who identifies it, is one trader’s trend another trader’s noise? Many of us might identity what we term a daily trend, whereas technical analysis experts would scoff at such a notion, suggesting that trends can only be identified over a longer term period; weeks or months, and only if a trend has actually developed, or is developing. But who is right; if the daily trend is one you can easily identify, shouldn’t you continue with that technique, even if purist technicians dismiss it?

Moreover, a short term, day trend can be easier to identify. Some days it emerges, others it doesn’t, its emergence can perfectly dovetail with a day trading strategy, a trading method which they majority of retail traders engage in. For example; on certain days fundamental news may emerge overnight/early morning effecting the price of: euro, yen and U.S. dollar, European news may continue to support the early direction price (on these major currencies) has developed. Thereafter, USA fundamental news may support the emerging daily trend and the trend may then last until the New York session trading activity tapers off.

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Now whilst this scenario may appear (on first inspection), to be far too convenient an occurrence, this pattern is in fact quite common in our 24 hour, 5 days a week, trading environment. Therefore trading off (and with) a daily trend, can make perfect sense for many traders, who prefer not to look towards the bigger picture. Day traders might not have the time to study their charts and the appropriate time frames, constantly scouring for traditional trends, via tech analysis and perhaps the use of standard trend lines, which incidentally need to be redrawn on each and every time frame. Just as experts may dismiss a trend below certain lower time frames, many could, in theory, dismiss a trend, unless it appears on a weekly chart.

In short; we could put forward a contention that trends, their use and their identification, is as personal an issue as your trading technique. That claim would be borne out if you gathered several technical analysts together in a room and asked them to identify a trend on a current pair. The opinions would vary widely, not only on where the trend is, but the methods used to identify it.

For day traders, who never hold trades overnight, identifying a daily trend and trading accordingly,  makes an excellent platform from which to build an overall strategy. Naturally the usual caveats of sound money management and controlled risk still apply, but trading with the daily trend, perhaps only taking a long trade if price is above R1 and only taking a short trade if price is below S1, is one of the simplest, most effective strategies, successful day traders have employed for a considerable length of time.

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