FOREX Trend Trading Strategies
Traders have many different strategies from which to choose when trading a financial market. The foreign currency exchange market, or Forex, is one of the riskiest environments for any type of trading. But one branch of trading, trend trading, remains as valid in Forex as in any other market. Trend traders learn to identify a solid, consistent price movement in one direction, and then participate in that price move. You can identify these trends in different ways.
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Dow Theory
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The first formal method for chart analysis ever introduced into the financial markets consisted of a strategy for identifying trends. Charles Dow outlined the strict rules necessary for the term "trend" to apply to a particular financial instrument. When looking at a chart, see if the recent peaks and valleys show a pattern of "higher highs and higher lows." This means that the most recent high is higher than the previous high, as is the most recent low higher than the previous low. If so, the market is trending. Buying into such a pattern often leads to higher prices, while a market without this pattern is not trending.
Trend Lines
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Many traders employ use of simple straight lines drawn directly onto a price chart. You can usually invoke a drawing tool inside charting software. When not available, it becomes easy to imagine a straight line on a chart. A trend line should be able to connect at least three low points in a positively sloped line, or three high points in a negative slope. When such a line is possible, then the market is trending. Most trend traders who utilize this approach enter the trend as prices fluctuate back to the trend line. If the trend remains intact, prices will usually continue the trend, leading to profit.
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Moving Average
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A third method for identifying trends is with a technical indicator called a "moving average." This tool is also available inside charting software. It creates a fluctuating line on the chart, superimposed over the price action. This line shows the change in direction of the average price. When average prices are rising, the moving average line is sloped positively, indicating a trend. The moving average is open to much greater variation and interpretation than other trend tools. The number of bars used in the moving average calculation is set by the user, which leads to varying results. With any setting, as prices rise up through a positively-sloped moving average, this can be a potentially rewarding entry point in an existing trend.
Warning
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All trends come to an end eventually. At some point, a trend fails to put in a higher high, or it violates a trend line. And moving averages always change directions. For this reason, you must accept that even strong signals as these can create false confidence and give you misleading information. Trading is never easy, especially in a risky environment such as Forex.
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