What are trends and how to trade them

Trends are one of the most important aspects of forex trading for successful traders. Understanding that “the trend is your friend” allows profitable trading and helps traders to avoid potential losses. Both technical and fundamental traders use different variations of trend trading and this simple analysis forms part of many trading strategies.

What is the trend?

The trend can be described as the general direction of price over a given period of time. This means that at any one time, and on any timeframe, price will be going in one of three directions: up, down or sideways. For technical analysts, trends are clearly visible from larger timeframes such as the hourly or daily charts which show the general rise and fall of currency values throughout several weeks or years. Although currencies experience price fluctuations each day, the general trend can be seen as the dominant direction as viewed on the larger timeframes. For fundamental analysts, the trend is dominated by the underlying market conditions and fundamental factors such as interest rate forecasting or economic performance. These influences are considered to have a long-term impact on the general direction of a currency’s value.

How understanding the trend can help

“The trend is your friend” is a mantra used by many traders in order to make sure that they make their longer-term trading decisions based on the general direction of the underlying trend. Many traders will look at either the technical or fundamental price trend and then take trades only in agreement with this. The rationale behind this is that the probabilities of a successful trade are increased when this is in agreement with the trend. Technical traders may take the daily trend as an indicator of their intra-day trading on the 5-minute chart. Since these traders know that the daily trend is likely to continue, it is logical to take trades which move in this direction in order to take advantage of the additional momentum.

Fundamental traders will look at both the current situation and future forecasts in order to take a long-term trade on forex pairs. This may be based on the understanding that, for example, the European Central Bank will increase interest rates in the future which will make the currency more attractive to investors. This, alongside other factors, helps to generate a general price trend which can again form the basis of fundamental trading decisions.

Trading using the trend

Technical traders analyse price charts to find opportunities based on familiar and high-probability patterns. Trends are not only visible on higher timeframe charts but also on intra-day charts. Smaller trends form throughout the day and these can be seen as the rise or fall of price to form technical patterns such as channels and trend lines. These can be successfully traded using a number of techniques including buying/selling when price reached the outer lines of these intra-day trends or when price corrects before continuing. Understanding the general, long-term market trend will again assist in making sure that a trade is taken with the highest probability of success.

Buying and selling short-term corrections

Trading pull-backs and market corrections are also a good way to take advantage of trends. Markets never travel in a straight line but the general trend provides the underlying direction. Buying or selling when the market experiences a correction, and therefore moves against the trend, is a good way to insure the best entry price in the direction of the trend.

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