What is a Forex Trend Trading Strategy?
Forex trend trading strategies are when a forex trader will look to buy or sell currency pairs when price is clearly moving in a particular direction. Forex trend trading is amongst one of the most popular and well-respected methods of trading forex online, as the old saying goes, “the trend is your friend”.
The forex market can be analyzed for up trends and down trends by using technical indicators such as the moving average and parabolic SAR. Other indicators such as the ADX and MACD can be used to gauge the strength of a trend. Oscillators such as the CCI and Stochastics can be used to identify pullbacks into the trend for possible entry positions.
Forex currency pairs can develop trends on multiple chart time frames. There can be trends on the 1-minute chart all the way through to the 1-day and yearly charts. The higher the time frame, the more likely the trend is being watched by more traders, including some of the big players such as banks and funds. I tend to find that the lower chart time frames can contain too much noise and therefore presents too many false trend trading signals.
Forex trend trading strategies usually look to hold trade position for as long as possible, riding the trend until it’s conclusion. Forex trend traders will often lock in trades at break even once it has moved in their favor and utilize a trailing stop to try and maximize the possibilities. Some will even close part of their position to bag some pips whereas others may scale up on trades once in an established trend. This makes forex trend trading a flexible strategy which can be adapted to individual trader needs.
What are the Advantages of a Forex Trend Trading Strategy?
With so many currency pairs to choose from and multiple chart time frames, there is always the possibility to look for trend trading opportunities. This is great for those who do not have much time to dedicate to trading. Not only do trends frequently appear on currency pairs, but they can be found on any other trading instrument including stocks, commodities and cryptocurrencies.
You can even set alerts via email or SMS to send you notifications when a trend trading signal has appeared according to your trend trading strategy. Alerts will save you from having to constantly stare at the charts all day waiting for trends to form. This could for example be when two moving averages cross. When a 50-day moving average cross above or below a 200-day moving average, this is known as a golden cross. It can identify the start of a long-term trend.
Trend trading strategies can be very easy to implement once you know how to spot trends. There are plenty of technical indicators built into online trading platforms that can help you to easily identify market trends. The important part will be timing your trade entry into the trend and using sensible money management.
Trend trading strategies can be used for short and long-term trading. They can often lead to trade setups that catch big moves with favorable risk to reward ratios due to the momentum market trends can gather. If price stops trending, it doesn’t take long to realize this at which point a trade can be exited and you can begin to look for another trend to form.
Fundamental factors can work in favor of trend trading strategies. If there is a major news release that occurs during a trend, this can increase the momentum and give traders the opportunity to catch some big moves. Also, if a currency pair is trending, it can show the strength or weakness of the underlying currencies which can be confirmed by checking other charts with the same currencies.
As they are usually targeting more than just a few pips, trend trading strategies can be less susceptible to forex broker spreads and slippage. In any case, I would personally prefer to use an ECN forex broker in order to get trades executed at the best possible prices from their liquidity providers (LP’s) with reliable execution speeds.
What are the Disadvantages of a Forex Trend Trading Strategy?
Forex trend trading strategies can perform poorly if traders are not identifying significant enough market trends. I have often seen beginner traders using lower chart time frames and trying to spot trends that do not have enough importance in the overall bigger picture.
You will often find that a trend on one-time frame can be contradictory to a trend on another time frame. Therefore, I would always verify a trend is relevant across as many time frames as possible, especially the higher chart time frames which I find can have more importance over the mid-long term. These trends can be watched by more market participants which gives them a greater emphasis.
A forex trend trading strategy is unlikely to perform well without additional analysis on other factors such as support and resistance, fundamentals and price action. For that reason, the success rate can depend on much more than simply spotting a market trend. I would combine all types of market analysis with a forex trend trading strategy to filter signals.
If the trend trader is not using sensible money management and does not plan stop losses effectively, a trend trading strategy can cause them to be whipsawed in and out of the market. It is important to realize that not every single trend trade will come to fruition and there will be losses which is a completely normal part of trading any forex strategy.
If for instance, the stop loss is placed just below the moving average for a buy trade or just above the moving average on a sell trade, there is a chance that the trade is taken out prematurely multiple times if the market goes through a consolidation period.
I would look to place my stops on a previous high or low and give the trend a chance to prove itself. Furthermore, I would only take trend trades that give a favorable risk to reward ratio of at least 1:3 so that one losing trade does not wipe out multiple winners.
Forex Trend Trading Strategies
There are thousands of forex trend trading strategies that you can find online. You can also use the technical indicators built into trading platforms to create your own trend trading strategy template that suits your individual trading style. The primary concept of breakout trading is to spot if there is a market trend and the trend direction. You will then look to enter the market in the direction of the trend by timing your entry.
Pullback Trend Trading Strategy
This forex trend trading strategy looks to enter a trend when price makes a pull back against the trend direction before continuing in the original direction. Often, a trend trader will use an overbought/oversold oscillator to identify a pullback into a trend. An oversold market during a pullback in an uptrend could suggest soon price will soon continue to increase.
- Use multiple moving averages to identify market trend
- Use an oscillator to spot a pullback into the trend and conduct price action analysis to show market is turning
- Enter on continuation of trend
- Place stop on opposite side of trend or recent high/low. Take profit once the trend has come to an end. Some traders may also lock the trade in at break even and stay in the trend longer to try and gain additional pips. You should of course adapt money management according to your own trading style as everyone is different.
Breakout Trend Trading Strategy
Another popular way to trend trade is to use a breakout trading strategy to enter in the direction of the trend when there is a breakout of important price levels. You can mark important prices for possible breakouts using support and resistance lines, pivot points and Fibonacci levels. One key thing about breakout price levels is that many big players use them so the levels can have added impetus.
- Use MACD to identify market trend
- Mark support and resistance on the chart
- Wait for price to break through support or resistance in the trend direction or place a pending order
- Enter the trade in the direction of the breakout
- Place stop loss and take profit on either side of support or resistance
New Trend Trading Strategy
This is one of the toughest trend trading strategies in my opinion but it can also be the most lucrative when successful. The primary idea behind a new trend trading strategy is to enter just as a trend starts forming. Whilst this can mean that you by low and sell high, it can also mean that there are multiple losses incurred whilst trying to find the start of a trend. I would personally wait at least for one trend correction before considering a trend trading position.
- Wait for a combination of technical indicators such as the ADX and Ichimoku Kinko Hyo along with price action analysis to mark the possible start of a trend
- Enter trade in the direction the trend would be heading should it form
- Exit the trade if the trend fails or manage the position should it come to fruition
Forex Trend Trading Strategy Conclusion
Forex trend trading strategies are very popular and flexible to suit all different trading styles. Finding trends on charts is the easiest part. The key to success with a trend trading strategy will most likely be timing your entry into the trend and your money management. Of course as with any trading strategy, it will be important to have a good trading plan and trading discipline with your emotions under control.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all forex trend trading strategy signals. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice forex trend trading strategies, you can open an account with a forex broker and download a trading platform completely free of charge. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.