“Just follow a trend”, they said. “Buy in an uptrend, sell in a downtrend. It’s as simple as it sounds”. Everyone who tried trading knows that trend trading is not that simple at all, so here are some points which can help you in getting the best out of forex trends.
Leonardo da Vinci said, simplicity is the ultimate sophistication, so let’s put together all the tips that make one’s trend trading simpler and more efficient. To begin with, we distinguish two states of the market: a trend, which is a directional movement of an asset to the upside or to the downside, and a range, when price moves horizontally or, in other words, sideways. Let’s start with such a plain thing as a trendline. This is a common tool of technical analysis, so common that many traders don’t always pay much attention to it as they hurry to use some more complicated instruments. Yet, one has to draw trendlines with care and precision for them to be as helpful as they can.
The main purpose of a trendline is to make the picture on the chart clearer. It’s possible to draw many trendlines on one chart and doing so may be a strong temptation for newbies. However, multitude of trendlines will likely be confusing. The goal of a professional is to pick the most obvious ones and work with them: if a trendline is evident, it means that many traders, including large speculators, recognize it. As a result, the odds that such line will hold the movement of a currency pair are higher. According to the logic of trend trading, we open positions in the direction of a trend. Let’s review the course of actions:
Step 1: Determine the trend using price action and technical indicators. Study the trend on different timeframes.
Step 2: Plan your entry. Buying on a rebound from a support is less risky than buying on a break of a resistance. Look for chart and candlestick patterns. Don’t hurry with opening a position. Be patient and wait for a proper entry time.
Step 3: Limit your losses. If you are trading an uptrend, one of the solutions is to put a Stop Loss order below the previous low, but you may use other ways of setting a SL as well. It’s important to understand that trend trading is a bet that the price will keep moving in a certain direction. If this bet didn’t work, there’s no point in sticking to this trade.
Step 4: Set your target. We find that it’s much better when the target is determined in advance. When your Take Profit is triggered, congratulate yourself with profit. Don’t move your TP higher or lower: respect your own analysis and the decision you made when you had chosen your TP. You’ll have plenty of opportunities to open new trades in future. TP should exceed SL: risk/reward ratio should start from 1:2.
To sum up, while you should be flexible about some things in trend trading (e.g. managing position size), you should not allow yourself flexibility in other things (no SL moving in case of losing position, no moving of TP). Bear this distinction in mind and let the trading force be with you!