Except that , when trading, the trader has the momentum of the market behind their trade. The first step in determining the trend is to check the Daily charts of each currency pair, and look for the strongest trend in either direction. Below are a few examples of a currency pair demonstrating a strong trend. If a trader is not sure of the direction, choose another currency pair as we are looking for the strongest available trend to trade.
We can see on the chart above, simply by looking at price action , that the pair is in an uptrend. In addition to visually seeing the trend of the currency rising to toward the top-right corner of the chart, we can also confirm the uptrend by noting that the pair has been building higher highs in green and higher lows in red as it moves up.
When trading an uptrend, an excellent strategy is to wait for a pullback to a support level and then take a long buy position in the direction of the Daily trend. On the chart above, once the uptrend has been established, a trader could take a long position near the points denoted in red on the chart. The stop-loss would be placed below the lowest point that the price had traded in each of those pullbacks. The opposite would be true when trading a downtrend. The downtrend is identified when the pair has been building lower highs green and lower lows red.
In this case, the trader would sell into the downtrend by waiting for a pullback to a level of resistance green and then taking a short position in the direction of the Daily trend, with a stop above the highest point to which the pair traded in the pullback.
The key here is that by trading in the direction of the Daily trend, the trader will be entering trades that have a greater likelihood of success since the momentum of the entire market is behind them. While pips can be made trading against the trend, any pips earned in a countertrend trade will come with a much greater level of risk associated with them. As traders, we want to eliminate as much risk as possible from each trade.
You should now have an understanding of the way to determine the trend of a currency pair. To contact Richard, please email instructor dailyfx. New to the FX market? In the course, you will learn about the basics of a FOREX transaction, what leverage is, and how to determine an appropriate amount of leverage for your trading. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. Forex trading involves risk. The great thing about this method is that it's very simple and since it's dynamic, it can adjust to market volatility.
Another way to use moving averages to determine a trend is by using a moving average crossover strategy. You can use the simple 50 and moving averages, which are commonly used settings. I did a test on this system with multiple backtesting software products, and the tests turned out positive.
Another indicator that can be used to identify and ride trends is the RSI. You can track the 50 level on the RSI and use that as a way to identify pullbacks that can be used to enter an existing trend. I did a test with this strategy and it turned out profitable. More testing would have to be done, but you can see the results here.
The final popular indicator that can be used to trade trends is the MACD. You are looking for a crossover in the MACD signal line to take a trade. Here's one example of a long trade. You could have entered at the left arrow and exited at the arrow on the right. As you can see, this trade would have been profitable, but the exit was not ideal. So you would have to do some testing to figure out a good exit strategy. Like other trend indicators, you cannot take every signal because that will give you too many signals and eventually blow out your account.
Therefore, you would need to have some sort of filter that will allow you to only trade the higher probability crossovers. Now let's take a look at more complex trend trading strategies. This trading strategy is not widely known, but it's one of the most aggressive trading strategies that I've ever seen.
It uses a set of proprietary indicators. Luckily they are available for free on most trading platforms. The Bill Williams method looks for consolidation periods and enters the market when price breaks out. Then it aggressively adds positions as the market continues to move in your favor. I've tested this strategy it can lead to some gigantic winners. The only downside is that it takes a lot of time to manage, so you can really only trade a few markets at a time.
Here's an example of what the indicators look like. They are available for free on TradingView. Get the complete trading system in Bill's book here. This trading system is well known. It was featured in the Market Wizards book and many of the traders that learned this system went on to run very successful hedge funds. But it adds in some position sizing rules and other risk management rules that help the trader maximize trending environments and minimize losses in whipsaw environments.
I've found that for some people, this method of trading makes complete sense. This guy is one example. If you don't want to buy the book, you can also get the free PDF here. Here's an example of Donchian Channels applied to a chart on TradingView. So those are the most frequently used ways to identify and trade a trend. Of course, the tricky thing about trends is that you never know when they are going to end. Therefore, you either have to try to get in early to capture most of the move, or look for an established trend and take a piece out of it.
But when you have the right tools on your side, and you practice using them, you can spot trends and profit from them. Regardless of which method you use, be sure to test your trading strategy thoroughly before you risk real money.
If you're new to trading, start by taking our free beginner's course. Once you understand the basics, then it's time to create a trading plan and start backtesting.
They attempt to measure the strength of the trend and give traders a feeling for their strength. Trends are not finite; some might even say that trends are illusions due to the constant manipulation of trends depending on your timeframe and other factors. This is why you need to know and understand the timeframe you are using before you start trying to identify any trend directions. Some considerations to keep in mind when you are choosing a timeframe:.
Throughout the following trend indicator guides, we will refer to the concepts of uptrends, downtrends, and ranges. Uptrend refers to higher highs and lows. Downtrend refers to lower highs and lows. And the range is contained between highs and lows. Strong trends have little to no pullback on their price; healthy trends have a healthy pullback that remains above the 50MA moving average , and weak trends have a steep pullback that remains above the MA.
The first trend indicator we will be looking at is price action. Price action refers to the careful reading of the current market structure, momentum, monumental trends, and sentiment. These three factors combined can be used to identify the potential in various trade opportunities.
Price action is considered to be one of the most valuable types of trend indicators. When you know the price action, you will have valuable data to help you understand the various line charts and other trend indicators featured in the rest of this guide. That is why it is better to identify trend direction without using candlestick charts.
Instead, line charts should be used for an easy to digest format that will give you a clear picture of various trending factors. Is the line pointing higher as the chart goes on? Is the line pointing lower as the chart goes on? Is the line flat as the chart goes on? Line charts should not be used exclusively but as part of a comprehensive trading system to help you identify the general direction without getting bogged down in precise details.
Moving average is another trend indicator that will actually work. Moving average refers to summarizing past prices, which are then plotted onto a line chart to give you an idea of the moving average of those prices. A moving average indicator chart will help you identify the overall direction and, most importantly, the strength of a particular trend. For the easiest way to use a moving average to identify a broader direction of a trend, you need to consider these two factors: if the current price is above the MA Moving Average , then the trend is a long-term uptrend.
If the current price is below the MA, then the trend is a long-term downtrend. When you want to use the moving average to determine the strength of a trend instead, consider the following factors: If the price tends to stay above the 20MA, then it is a strong trend. If the price tends to stay above the 50MA, then it is a healthy trend. If it tends to stay below these MA numbers, then it is a weak trend. In general, this trend indicator is most useful in markets that are in uptrend or downtrend—but is relatively insignificant in markets that are in a range.
A trendline is a unique tool indicator tool that you can draw on your trending charts. A trendline will help you more accurately identify the direction and strength of a trend, but only if you are using it in the right way. Trendlines need to be done accurately to be a helpful reflection of overall trend direction and strength. Once you have the trendline finished, then you can interpret it. I'll also show you a couple of popular trend trading systems.
Test each of these methods out in demo or backtesting and get a feel for what you are most comfortable with, and gives you the best results. Some strategies try to get into the move as soon as possible. When you trade this way, your winning percentage is usually low. Another way to approach trend trading is to try to get most of the middle of a trend.
This method requires a little patience because you have to wait for a trend to develop. In addition, you have smaller winners because you're only getting the middle of the trend. The potential benefits of this method are that you generally have a higher win rate than the previous method and you might have a little more confidence entering a trade because the trend is more defined.
Now with those concepts in mind, let's get into the methods that you can use for trend trading…. The method that I prefer to identify a trend is pure price action. This involves looking at the Energy Flow of price, and is the purest form of technical analysis. First, let's take a look at a chart. The circled areas are places where price formed higher lows and you could have potentially entered trend trades.
Next, we need to understand what the market typically does before a trend. You might have a chart that is showing higher lows or lower highs, but it might not be the start of a trend because price didn't consolidate before it started trending. Of course, some currency pairs are more volatile than others. So you should test your trendline strategy extensively before trading real money. You can also use indicators to determine a trend.
Some traders find this more comforting because they have definitive number or line that they can use to define a trend. One simple way to identify a trend is to use one or more moving averages. It can act as a dynamic support and resistance level in a trend. For example, the 20 exponential moving average EMA is a popular moving average to use to identify trends.
The great thing about this method is that it's very simple and since it's dynamic, it can adjust to market volatility. Another way to use moving averages to determine a trend is by using a moving average crossover strategy. You can use the simple 50 and moving averages, which are commonly used settings.
I did a test on this system with multiple backtesting software products, and the tests turned out positive. Another indicator that can be used to identify and ride trends is the RSI. You can track the 50 level on the RSI and use that as a way to identify pullbacks that can be used to enter an existing trend.
I did a test with this strategy and it turned out profitable. More testing would have to be done, but you can see the results here. The final popular indicator that can be used to trade trends is the MACD. You are looking for a crossover in the MACD signal line to take a trade.
Here's one example of a long trade. You could have entered at the left arrow and exited at the arrow on the right. As you can see, this trade would have been profitable, but the exit was not ideal. So you would have to do some testing to figure out a good exit strategy. Like other trend indicators, you cannot take every signal because that will give you too many signals and eventually blow out your account. Therefore, you would need to have some sort of filter that will allow you to only trade the higher probability crossovers.
Now let's take a look at more complex trend trading strategies. This trading strategy is not widely known, but it's one of the most aggressive trading strategies that I've ever seen. It uses a set of proprietary indicators.