How To Trade Trends In Forex
Ah, trends. When looking back at charts, its hard to ignore the giant trends that occur in markets and think about how much money there is to be made. On the menu today is a delicious plate of how to trade trends in Forex.
- Definition of a trend.
- How to trade trends?
- Chart examples.
- Analysis of different timeframes.
- How to determine the strength of a trend?
- Stages of trends.
- Why is trend trading a good approach?
What is a trend?
A trend refers to a market that is consistently making higher or lower prices. An uptrend is when a market makes higher lows and higher highs, a downtrend is when a market makes lower highs and lower lows.
Uptrend example- GBPUSD Daily
Downtrend example- NDUSD Daily
How to trade trends in Forex
Traders who base their decisions on technical analysis generally implement one of 2 approaches to trading trends: 1- Use technical indicators of supply and demand, such as horizontal support/ resistance, indicators or trendlines, to determine where a short term move against the trend should end and join with the trend direction. 2. Trade breakouts in the trend direction.
1. Using short term moves against the trend to enter
While this might seem confusing in writing the chart example following will clear this up, essentially in an uptrend a trader will attempt to buy at a potential higher low and in a downtrend sell at a lower high. To do this technical analysis tools are used to weigh if the market could turn.
Using horizontal levels- GBPJPY H1
Traders can use horizontal levels of support and resistance to join the trend. Looking above at GBPJPY the previous higher highs can be used as support to buy and join in the uptrend.
Using trendlines/ channels- NZDUSD H4
On NZDUSD there is a confirmed channel, therefore the 3rd touch of the trendline can be used to enter a sell with the downtrend.
2. Entering after breakouts
Another great way to enter with the trend is to wait for breakouts to occur in the direction of the trend and then enter after the breakout. This approach has the added confirmation that the trend side is still strong since there was enough strength to break through an area of supply or demand.
Horizontal breakout- USDCAD H4
USDCAD was trending upwards but eventually encountered resistance (shown as the red box). However, price eventually broke through the level of resistance, this could be an opportunity for a trend trader to enter with the trend.
Horizontal breakout retest- EURGBP Daily
EURGBP trended down and then struggled to move through a support level (shown in red). But after the market broke through the level of support, to reduce the chance of a false breakout traders can wait for the retest of a level, EURGBP retraced and touched the level which can be used as an opportunity to sell with the trend. If you are interested in trading breakout retests, then read this in-depth article.
Trendline breakout- EURCAD H4
During a short-term retracement of the uptrend on EURCAD, a trendline can be drawn connecting the highs (as shown). There are 2 opportunities to enter a buy with the overall trend in this example: The first is as soon as price breaks through the trendline (green arrow) and the second is when price retraces and tests the trendline (black arrow).
Different timeframes of trends
Trends are present on all timeframes, therefore it is always best to ask yourself what the trend is of the timeframe that you are trading, instead of asking that question in a general sense.
Markets are fractal, meaning that the smaller timeframes make up the larger timeframes. Because of the nature of trends, the market can be in a downtrend on the H1 but an uptrend on the daily.
Trends on different timeframes- GBPAUD Daily
As shown on GBPAUD, the trend differs depending on the timeframe that you are looking at. Overall GBPAUD is in an uptrend on the Daily, however, in the grey boxes the market was trending down on the H1. On the daily, these downward moves were retracements of the larger trend.
Which brings us to the question, to be a profitable Forex trader, what timeframe trends should you focus on? The answer can only come from you; because it is determined by whether you are a short term trader, a swing trader or a long term trader/ investor.
Therefore you should pay the most attention to the trend on the timeframe that you are trading, and find opportunities to join with that trend.
How to determine the strength of a trend?
The main ways to determine the strength of the trend are as follows:
1. Higher timeframe trends are stronger than shorter timeframe trends.
2. The longer (greater amount of time) a market is trending for, the stronger the trend.
3. When a market moves in a definitive direction on high volume this is stronger than moves on low volume.
4. If the opposite side struggles to fight back, that is a sign of a strong trend e.g. if retracements are shallow and occur on low volume.
Stages of a trend
Chances are you have heard “the trend is your friend”, you may have also heard “the trend is your friend until it ends”. Yes, that’s right, all good things come to an end…even trends. It’s ok though, it is possible to prepare for most changes in trend by recognizing what stage the market is in.
Beginning of a trend
Trends begin either through a reversal or after a breakout of a range type environment. If it begins as a reversal, the other side of the market did not have the strength to continue the move in that direction; if it begins as a breakout then usually this will be confirmed by an extension past the breakout zone and the market should then move on higher volume.
More often than not, the strongest part of a trend occurs in this phase. The opposite side struggles to take control of the market, any retracements are usually met with strong buying (uptrend) or selling (downtrend).
Market reversal or range
A trend will either end through a full-on reversal or range-bound activity. When a trend is losing strength, this is characterized by decreasing volume and the failure to make new highs (uptrend) or lows (downtrend). If the market has run out of momentum, it is best to leave the trend alone and exit any existing positions.
Why is trend trading a good approach?
- The main reason that trend trading can be so profitable is that your positions join with the market direction, instead of fighting it.
- Improved risk to reward is another advantage. Because the forces of supply and demand usually drive in favor of a trend, they have a greater potential to extend further.
Do you trade trends but want to improve? Are you looking to become a trend trader? Either way, by following the guidelines set out in this article you can significantly improve your trend trading results.