The Forex Trendline Strategy
Every day, traders employ both complex and simple strategies to make money off currency exchange rates. Trading the foreign exchange market, or forex, can be lucrative, but not without extraordinary risks. Those new to trading this difficult market should focus on straightforward strategies that minimize risks while offering potentially large rewards. The trendline strategy is one such method.
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Purpose
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A trend is a consistent price movement in one direction, with little fluctuation or volatility. An uptrend leads to higher prices over time, while a downtrend causes prices to drop indefinitely. Trends occur in every market, but not all the time. Participating in a trend can be rewarding. Since a trend usually continues longer than anyone might easily predict, joining a trend midway can quickly lead to profits. The forex trendline strategy provides the techniques for trading trends responsibly.
Identifying the Trend
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Chart any forex exchange rate between two currencies. Make note of the highs and lows that appear on the chart as prices swing up and down over time. While many different techniques exist for determining if a trend is underway, the trendline is particularly simple. If you can imagine a perfectly straight line on the forex chart that connects at least three consecutive lows, and this resulting line has a positive slope, then a trend is forming. Most forex charting software provides drawing tools that let you place a line directly on the chart to facilitate this identification. If this particular exchange rate is not trending, simply chart a different rate between other currencies until you find one that is trending.
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Trade the Trend
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A solid trend will usually retreat back to the trendline and then bounce off it, continuing the trend and leading to higher profits. Buy into the trend only when prices fall at or near this trendline. This minimizes your risks as you enter at a relatively low price with solid upward momentum. If the trend holds, prices will bounce off the line and lead to quick profit. You can exit all or part of your position once the prior high is surpassed with a new relatively high price.
Stop Losses
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A "stop loss" is a pre-determined exit scenario in the event that the trade moves against you. With the forex trendline strategy, it is easy to know when the trade becomes too risky to maintain. If prices retreat to the trendline, and then pass through this line, the trendline no longer holds. This is a warning that the trend is weakening or has ended. Since you entered right at the line, you will know quickly and with a small loss if the trade won't work out. Just exit the trade and look for another trend in another currency.
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