One of the major difficulties in trading trends is that by the time the trend has been established it is often too late to enter a trade. Whilst trends are simple and appear obvious looking retrospectively at forex charts, they can be difficult to enter early and also very difficult to exit in real-time trading situations. Becoming involved early in a forex trend relies on entering with a signal that the market is either going to continue in its current trend or reverse to form a new trend. There are multiple ways to try to do this with the aim of making the most out of the large, profitable trends and also some key problems which are often experienced trading the trend.
Trading the beginning of a trend
One of the most difficult aspects of trend trading is trying to establish when a trend is about to begin. Typically, trends in a new direction will start with a reversal pattern and many traders will look to hold these positions as the trend continues to make their position profitable. Key reversal patterns for technical traders are double tops and bottoms, breakouts and exhaustion indicators such as heavily overbought or oversold momentum indicators. Once it has been established the market is likely to begin trending in the other direction, a good entry will be based on correct trading of that particular reversal pattern. One of the key problems in trading these patterns is the likelihood that once the pattern has completed successfully the trader will be shaken out by corrections as the new trend takes hold. As can be seen from historic chart data, trending prices do not move smoothly and the potential for a position to be closed during pull-backs is obvious. A technique to counter this issue is to move the stop to break even as soon as reasonable possible after the first retest of this level. Needless to say the initial establishment of a new trend is difficult to hold in real-time with profits being erased by market corrections throughout the trend.
Trend trading with moving averages
Trading using the crossover of two moving averages is a very popular trend-following method which works exceptionally well during back-testing. The problem with moving averages, however, is that they lag the real-time situation and provide delayed entry and exit signals as a result. The benefits are that they can provide good signals for longer-term trends and which make up for this. Moving average trend-following strategies also may help to avoid whipsaws and false breakouts which are often experienced in trying to catch the start of a new trend.
Holding on during the trend
The ability to hold on to a trade during a trend without any idea when this may end is certainly aimed toward the more patient trader. Indicators such as momentum oscillators will assist with this and some traders prefer to build their position on the pull-backs during an established trend. Drawing trend lines will also allow you establish when the trend may no longer be valid as this should act as a very reliable support level between the highs or lows of the trend. Looking forward to areas on different timeframes where additional resistance may occur, such as round numbers, important previous highs/lows and technical levels will give a good indication of where a trend may struggle to continue.
Exiting near to the end of a trend
Exiting during a trend trade is also very difficult when using popular signals such as price crossing below or above a moving average due to the lag with such indicators. Other ways to establish an exit may be the breaking of the trend support line. One popular technique is to wait for the trend line to be broken with a price bar closing below this in order to signal the potential end of the trend. The old trend line will then act as resistance during any subsequent retest of this level in order to confirm that the current trend has ended with perhaps a correction on a larger timeframe is underway.
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