As an article for Forex trading for beginners, you should be aware of the Trend trading strategy, which is quite popular with seasoned Forex traders. We have laid down some pointers to help you understand and execute Trend trading in the Forex market.
Trend trading is quite a popular strategy amongst Forex traders, where they identify and exploit the market based on the momentum of the price. You need to focus on three Trend indicators to carry out a successful trade. Discover these indicators as we get started on Trend trading.
What is Trend trading?
Trend trading is based on technical analysis and identifying the direction of the market momentum. Based on the premise that markets are somewhat predictable, a trader can predict what might happen in the future by examining historical trends and price movements.
Although this type of trading is considered a mid to long-term trading strategy, in theory, it can be utilized in any timeframe restricted only by the duration of the next trend change. As a result, this strategy is pretty popular amongst both position traders and swing traders.
Swing traders will see a trend and ride it from beginning to end, whereas position traders will maintain a trade for the duration of the current trend while ignoring daily changes.
Identification of a trend.
The goal of trend trading methods is to enable you to spot trends as early as possible and leave the market before they reverse. Traders have access to a multitude of data that may be utilized to determine the ebb and flow of the trend, including the opening price, closing price, and trading range of each candle.
Uptrends, downtrends, and sideways trends are the three major categories of primary trends.
An uptrend occurs when the value of a market price rises. When the market reaches steadily higher price levels, a trader looking to profit from these movements will open a long position. A firm’s share price, for instance, would be considered to be in an uptrend if it rose by 80p, dropped by 60p, increased by 110p, and then dropped by 50p. This is because it is making greater highs and higher lows.
It is referred to as being in a decline when a market price is losing value. A trend trader would open a short position when the asset slid to lower price levels. A stock would be in a downtrend, for instance, if its price dropped by 150p, rose by 120p, dropped by 200p again, and increased by 40p. Due to its decline to lower lows and lower highs, this is the case.
Market prices are said to be in a sideways trend when neither rising nor falling. Of course, the majority of trend traders won’t pay attention to these trends, but range traders or scalpers, who aim to profit from relatively brief market swings, will keep an eye out for these confined movements.
As you begin your journey in Forex trading for beginners, you should be able to spot such changes to maximize profits while simultaneously mitigating losses. It also helps with FX Risk Management.
Most popular trend indicators
Although several methods traders have developed to pinpoint these fundamental patterns, including observing market action, most trend trading strategies use technical indicators. The following are common trend trading indicators:
Moving average trend indicator
As its name implies, a moving average (MA) indicator determines an item’s average price over a specified interval. By doing this, it produces a smoothing effect on the price data, resulting in a single line that traders can use to spot trends. The 50-day and 200-day moving averages are common options, but ultimately the decision will be up to the individual.
Moving averages are lagging indicators because they change more slowly than market prices. This means that MAs can only be used to describe the past, not forecast future patterns. Nevertheless, they are highly helpful for trend traders since they can confirm whether the market is heading upward, downward, or sideways by looking at the direction of an MA.
A trader would concentrate on whether the price is above or below the moving average (MA) when looking at just one moving average. Price movement above or below the moving average is a sign of an uptrend or downtrend, respectively.
However, a typical moving average method is to watch for crosses between two moving averages, as this can indicate a change in the price trend. Normally, this would be two exponential moving averages (EMAs), one rapid and one slow.
A trend trader might open a long or short position depending on whether the fast EMA is above or below the slow EMA. As a guide to Forex trading for beginners, we would like to emphasize that you should take these indicators seriously, although it is not all that complicated to learn and understand.
Relative strength index (RSI) trend indicator
The relative strength index (RSI) is used to spot overbought or oversold indications and price momentum. To determine whether more price movements were positive or negative, it examines the average gains and losses over a specific number of periods, often 14, and determines whether they were more prevalent.
On a scale from 0 to 100, the RSI is displayed as a varying percentage. Markets are referred to as “overbought” or “oversold” when the indicator rises above 70 or below 30. Traders look for these levels as indicators that a trend may be maturing.
The market can be overbought or oversold for lengthy periods; it is important to remember this. In addition, though the RSI only varies between zero and one hundred, the market price can range over a much wider range of values, so the RSI is not always a warning of an impending shift in trend.
A trend trader in a long position will typically utilize the overbought signal as a price target to lock in a profit and close out a trade. However, a trader seeking to enter a short position would take the overbought indication as their entry point. Trend traders who use the oversold signal would do the opposite: they would use the oversold signal to close out short contracts and enter long ones.
Average directional index (ADX) trend indicator
A trend’s strength, whether up or down, is assessed by traders using the average directional indicator (ADX). From zero to one hundred, the ADX line varies. Values below 25 denote a mild trend, with the strength increasing as the numbers rise, whereas values between 25 and 100 denote a strong trend.
The ADX is frequently displayed in the same window as the directional movement index (DMI), which is made up of two additional lines: the negative directional indicator (-DI) and the positive directional indicator (+DI). The other two lines and the ADX line also indicate the trend’s direction and strength.
An indication that an uptrend is about to begin is noticed when the +DI crosses the -DI and the ADX are above 25, and traders may want to consider opening a long position. Conversely, when the ADX is over 25 and the -DI crosses above the +DI, it indicates that a downtrend is about to begin and a chance to open a short position.
The aforementioned indications won’t be able to identify every single trend with 100% accuracy. Still, they can be used to filter out markets that are not trending or are trending very weakly.
A profitable trend trading technique includes more than just technical analysis. However, even the best trading method won’t help you generate money over the long term if you don’t properly plan and manage your risks.
In this article, Forex trading for beginners, we have laid down the three major indicators you can use to make a profit. It would help you if you were to strategize your market entry and exit. It would help you even more if such strategies were to experiment on a demo account that would eventually make you confident in your research and strategies.