Forex Trading Trends

One of the key decisions Forex traders must make is what style of trading to use when trading foreign currencies. Although it is not absolutely essential to choose a particular style and stick to it, it is worth noting that different mind-sets and money management techniques are required by different styles. In this article, we look at one of the most popular trading styles used by Forex traders – trend trading. Trend trading is very common among traders of foreign currency, as the Forex market is well suited to this particular style.

What are Forex Trends

The basic principle of trading Forex trends is to look for a price movement pattern that is expected to continue, and take a position until the trend starts to reverse. In order to identify Forex trends, you need to be able to read and understand Forex charts, using technical analysis. Technical analysis in Forex is essentially the studying of movements in the price of currencies, and using that information to determine patterns, which you can use to your advantage.

The basic idea is to make your move early on in the trend, and exit your position as soon as possible after trend begins reversing. Forex trends can be analyzed as uptrends, downtrends or flat trends and trends are ever present in the dynamics of the online Forex trading market. It may sound like a simple concept, and in essence it is, but it not necessarily easy to consistently spot trends that continue as expected.

While trends will always exist in the market, there is no guarantee that any particular price movement will continue and effectively become a trend. This is why using technical analysis is important, as it is assumed that all known information is taken into account by the price at which a particular security (in this case, currency) is trading at. This, theoretically, removes the need to analyze the fundamental, economic factors which can influence the price. You are using the price movements themselves to forecast what the price will do in the future, rather than predicting how the price will be affected by external factors.

How to Trade Forex Trends

As already mentioned, the basic concept of trading forex trends is quite simple. The goal of a forex trend trade is to identify a potential trend as early as possible, and exit the position at the right time. Essentially, you are trading on the expectation that the price of a currency will continue in its current direction.

It is very important to recognize the fact that trend trading involves making assumptions (ie. the assumption that the price movement is a trend and will move further in the same direction) and that your assumptions are just as likely to be wrong as they are to be right. Obviously, the better you become at your analysis of price movements and understanding what they mean, the better your chances of correctly highlighting a trend are. Even the most successful forex trend traders expect to have more losing trades than winning trades.

However, it is still perfectly possible to make money through trading forex, as the idea is that you make more profit on your successful trades than you lose on your unsuccessful trades. The primary method for ensuring that this is the case is by using stop loss orders. What this means is that when you enter a position, you set parameters for automatically exiting the position if the price does not move as expected and instead goes the other way. Most successful trend traders will set their stops just a few pips behind their entry price. The idea, therefore, is that when an expected trend does not continue the losses are very small – whereas if the trend does continue the potential for profit is much higher.

Trend trading can be done with all sorts of securities, such as bonds and stocks, but the reason it is so popular in the Forex market is because of the liquidity of the market. The Forex market is easily the most liquid market in the world and trading takes place 24 hours a day, five days a week. There is therefore very little risk of being stuck with a position and incurring losses that way.

Also, the Forex market offers traders plenty of potential for leverage, meaning that gains can be multiplied many times over. This is why it is very important to use a strict stop-loss rule; even if you experience several losing trades where a trend does not continue, but have limited those losses sufficiently, then getting in early on one trend that does continue can offset all of those losses and offer plenty of profit on top.